Colombia: Central Bank cuts rates unexpectedly in December
December 16, 2016
The board of the Central Bank (BanRep) decided to cut the lending rate by 25 basis points to 7.50% in a 4-to-3 decision at its 16 December monetary policy meeting. The decision surprised market analysts, which had widely expected the Bank to remain on hold for a fifth consecutive month.
The decision to cut rates came after inflation eased for a fourth consecutive month in November, falling to 6.0%. According to the Bank’s official statement, the supply-side shocks that fueled inflation in 2016 continue to fade quickly, as evidenced by a slowdown in food prices. Despite the improvement, inflation expectations remain above the 3.0% target.
BanRep also highlighted as important factors behind its decision Q3’s disappointing GDP growth result and the subdued state of the global economy. However, the Bank expects the global economy to recover slightly in 2017 and for the United States to continue its interest rate tightening cycle, which will likely influence Ban Rep’s monetary policy going forward.
The Bank concluded its statement by endorsing the government’s recently approved tax reform, which includes a broadening of the tax base and a Value-added Tax hike. BanRep considers the fiscal reform to be fundamental in order to avoid potential credit rating downgrades, ensure macroeconomic stability and to support long-term growth.
Former board member Juan José Echavarría will replace outgoing José Darío Uribe as governor of the Central Bank at its January meeting.
Author: Luis Lopez Vivas, Economist