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Colombia Monetary Policy January 2018

Colombia: Central Bank cuts the rate to 4.50% in surprise move; indicates an end to the easing cycle

Colombia’s Central Bank (Banco de la República, BanRep), opted to cut the benchmark interest rate by 25 basis points to 4.50% at its Board of Directors meeting held on 29 January. Four out of the seven board members voted to reduce the rate, while the other three chose to keep it on hold. The Bank’s decision came as a surprise to market analysts, who had expected the rate to be held steady.

Aimed at boosting subdued domestic demand, the surprise move came despite inflation in December coming in higher than the Bank’s projections. Inflation remained at 4.1% in the month, where it has been since October, ending 2017 marginally above the Bank’s target band of 3.0% plus or minus 1.0%. The latest data on countrywide economic activity in the final quarter confirmed that the domestic economy continues to linger in a weak spot, raising uncertainties over the speed of its recovery. Weighing the available information, most board members deemed it timely to cut the rate now and end the cycle of easing. Forecasting GDP growth to accelerate to 2.7% in 2018, the Bank foresees a continued strong performance by the external sector and higher infrastructure investment amid accommodative monetary conditions, which should support an upswing in growth.

While lacking substantive forward guidance, the Bank’s statement indicated that it would closely monitor the trajectory of inflation, along with forecasts on future inflation and economic activity against the backdrop of global developments to determine its monetary policy stance. The next monetary policy meeting will be held on 23 February.

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