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Colombia Monetary Policy December 2018

Colombia: Central Bank holds benchmark interest rate at 4.25% at last meeting of the year

At its Board of Directors meeting on 21 December, Colombia’s Central Bank (Banco de la República, BanRep) kept the benchmark interest rate on hold at 4.25%, where it has been since 27 April when the Bank cut the rate by 25 basis points. The latest decision was unanimous and in line with market expectations.

The Bank’s decision to stay put came against the backdrop of weak inflationary pressures as oil prices plummeted in the final three months of 2018. Inflation in November matched October’s 3.3% reading, thus remaining within the Bank’s 2.0%–4.0% target range. Stable inflation and well-anchored expectations led the Bank to remain on hold. As for the real sector, while activity in the persistently weak construction sector picked up—thanks to an upturn in investment in the sector—and domestic demand dynamics firmed up, the sharp decline in oil prices likely weighed on overall economic activity.

The Bank’s accompanying statement indicated a continued neutral stance. However, it provided little forward guidance beyond reiterating that the trajectory of inflation will be monitored closely in the context of global developments, particularly the U.S. Federal Reserve’s tightening cycle, the evolution of oil prices, and global trade tensions. That said, the BanRep is expected to embark on a tightening cycle in 2019 given that the emerging El Niño weather phenomenon and the recently-announced minimum wage hike are likely to stoke prices price pressures. The next monetary policy meeting will be held on 31 January.

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