Colombia: Central Bank increases the reference rate for the first time in over a year
September 25, 2015
In a unanimous decision, the seven members of the Central Bank (BanRep) Board decided to increase the reference interest rate by 25 basis points from 4.50% to 4.75% at the Bank’s 25 September monetary policy meeting. While the decision was broadly in line with market expectations, the unanimity of the vote came as a surprise to the market as, just a couple of days before the meeting, some Board members had suggested keeping interest rates steady due to weak growth. This is the first time the Central Bank has changed the reference rate following 12 consecutive meetings at which BanRep kept the rate on hold.
In its accompanying statement, BanRep reaffirmed that recent data pointed to weaker external demand than in 2014. While growth in the United States is solidifying, the Eurozone’s recovery has been weaker than expected. In addition, China’s economy is continuing to slow its pace despite the Central Bank’s measures to try to stimulate the economy, and growth in Latin American countries remains subdued or even negative. BankRep highlighted that, “in the United States, the Federal Reserve decided to maintain its benchmark interest rate unaltered. As for Latin America, the risk premia of the major economies remain at levels higher than those of 2014, and the value of their currencies against the US dollar has been volatile.”
Regarding the domestic economy, BanRep noted that growth in Q2 was slightly better than expected despite softer domestic demand thanks to the external sector’s contribution.
In terms of price developments, BanRep pointed out that inflation recorded another increase in August and that an average of four different measures of core inflation reached an over-six-year high. In addition, various indicators signal that medium-term inflation expectations are in the top range of the target or even above it. The main factors that are influencing these renewed inflationary pressures are nominal depreciation being passed to consumers, the increase in the cost of imported raw materials and a soft food supply. BankRep added that, “pass-through of part of the devaluation of the peso to consumer prices and the greater intensity of El Niño have slowed down convergence of inflation to the target, due to its direct impact on prices and inflation expectations as well as by the probable triggering of indexation mechanisms.”
Against this backdrop, the Bank decided to hike the reference rate for the first time in over a year. BankRep argued that, “the risk of a lasting increase in inflation and unanchoring of inflation expectations has risen, while the risk of an excessive slowdown in economic activity has not exhibited a noticeable change.” The next policy meeting is scheduled for 30 October.
Author: Eric Denis , Economist