Colombia: Central Bank leaves lending rate unchanged for third consecutive month
October 28, 2016
The seven-member board of the Central Bank (BanRep) unanimously decided to keep the lending rate unchanged at 7.75% at its 28 October monetary policy meeting. The decision was in line with market expectations and represented the third straight month in which BanRep kept the rate on hold. On 31 August, the Bank ended a year-long tightening cycle, during which it had increased the rate by a cumulative 325 basis points in an attempt to bring down high inflation, even as economic growth faltered amid a slump in oil prices.
Although the decision comes after inflation had already eased for a second consecutive month in September, the Bank acknowledged in its press release that it expects lower growth for this year. BanRep cut its 2016 growth forecast from 2.3% to 2.0%, in part due to the 45-day truckers’ strike that had hindered coffee exports earlier this year. The press release also highlighted that inflation should continue on a downward trend as the effects of temporary supply shocks such as the truckers’ strike, a prolonged drought and the weakening of the peso continue to fade. That said, inflation expectations remain above the 3.0% target.
On the external front, the Central Bank expects the global economy to recover slightly in 2017 and the U.S. to slowly tighten its monetary policy. The statement also emphasized that the mild improvement in crude oil prices, along with a drop in prices for certain imported goods, will allow Colombia’s terms of trade to improve.
The Bank concluded its statement by endorsing the government’s recently presented tax reform, which includes a broadening of the tax base and a value-added tax hike. BanRep considers the fiscal reform to be fundamental in order to avoid potential credit rating downgrades and to support long-term growth. The next meeting is scheduled for 30 November.
Author: Luis Lopez Vivas, Economist