Colombia: Central Bank holds the lending rate unchanged in January
January 27, 2017
The board of the Central Bank (BanRep) decided to keep the lending rate unchanged at 7.50% in a 4-to-3 decision at its 27 January monetary policy meeting, which was the first to be headed by recently appointed Governor Juan José Echavarría. The decision surprised market analysts, which had widely expected the Bank to cut rates for a second consecutive month.
The decision to hold rates came after inflation eased for a fifth consecutive month in December, falling to 5.8%, the lowest reading in 2016. According to the Bank’s official statement, the supply-side shocks that had derailed inflation from its target continue to reverse, as evidenced by a slowdown in food prices. Despite the improvement, inflation expectations remain above the 3.0% target.
While the Bank acknowledged that the economy likely remained sluggish in Q4, it highlighted that the recovery of external demand in 2017 will be faster than expected thanks to higher projected growth in Colombia’s main trading partners. The Bank also observed that uncertainty regarding international financial and trade conditions had increased since December’s board meeting, which will likely impact global interest rates and the U.S. dollar. Commenting on the latest monetary policy decision, Ben Ramsey, Emerging Markets Sovereign Risk Analyst and Katherine V. Marney, Economist at JP Morgan said:
“BanRep seems to be straddling a data-dependent stance with an easing bias. The data-dependent stance would seem to primarily be focused on inflation and inflation expectations. With BanRep’s new governor wanting to see inflation expectations behave better, we see another pause in February, with the easing cycle commencing again in March.”
The Bank concluded its statement by praising the government’s recently approved tax reform, which includes a broadening of the tax base and a Value-added Tax hike. BanRep considers that the tax reform will help to consolidate Colombia’s fiscal and external sustainability as well as allowing for higher long-term economic growth.
The next monetary policy meeting is scheduled for 24 February.
Author: Luis Lopez Vivas, Economist