Colombia: Central Bank extends interest tightening cycle
August 29, 2014
The Central Bank (BanRep) increased its reference interest rate by 0.25 percentage points to 4.50% at its 29 August monetary policy meeting. The decision was widely expected by market analysts and represented the fifth consecutive rate hike.
In its accompanying statement, BanRep reaffirmed that it took the decision to hike the rate taking into account the country’s current strong economic performance and inflation expectations that are close to its 3.0% target rate. The Central Bank expects that strong domestic demand will contribute to achieving solid growth of broadly 5.0% this year. In addition, the Bank stated that it sees the decline in unemployment continuing. Despite the fact that Colombia’s main trading partners have shown weaker-than-expected economic performance recently, BanRep expects external demand to pick up in the upcoming quarters, which will be largely due to the expected recovery of the U.S. economy. However, regarding the oil sector, BanRep stated that lower output and a drop in international crude oil prices will lead to lower oil revenues.
BanRep restated that it expects inflation to be broadly in line with the target rate in the medium-term. According to BanRep, while annual headline inflation rose in July, the Central Bank’s composite measure of core inflation fell for a second consecutive month.
BanRep’s statement that it hopes that the current interest rate is consistent with keeping both inflation and inflation expectations close to the target rate and economic activity at its full potential signaled that it might pause the interest rate tightening cycle that was initiated in April. The next policy meeting is scheduled for 26 September.