Colombia: Central Bank makes sixth consecutive rate hike to fight inflation
February 19, 2016
The members of the Central Bank (BanRep) Board decided to increase the reference interest rate by 25 basis points from 6.00% to 6.25% at the Bank’s 19 February monetary policy meeting. The decision was in line with market expectations. This was the sixth consecutive time the Central Bank hiked the reference rate. The next policy meeting is scheduled for 18 March.
In its accompanying statement, BanRep said that Colombia’s trading partners grew at a weak rate on average in 2015. While the Bank expects the economies of Colombia’s trading partners to grow faster in 2016, BanRep has revised down its forecasts.
Regarding the domestic economy, BanRep noted that it expects the economy to have grown around 3.0% in 2015, which represents an upward adjustment from its previous forecast of 2.7%. Growth in the last quarter of 2015 is expected to have been broadly similar to Q3’s result and was driven by stronger net exports, which more than offset less dynamism in consumption and investment. BanRep highlighted the necessity to undertake structural reforms due to the ongoing decline in oil prices, which has led to a fall in public revenue. In this regard, the Bank welcomed the government’s commitment to submitting new tax reforms in 2016.
In terms of price developments, BanRep pointed out that inflation in January and the average of four different measures of core inflation all exceeded the Bank’s projections and remain above its target. In addition, various indicators signal that medium-term inflation expectations increased and are at 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 through to consumers and a weak food supply. BanRep added that, “the magnitude of the depreciation of the peso and the intensity of El Niño increase the risk of a slower 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 sixth consecutive time. BanRep argued that, “higher-than-expected increases in food prices and further increases in the exchange rate, largely related to the fall in the price of oil, continue exerting upside inflationary pressures. Inflation expectations remain high and an additional pass-through of the devaluation of the peso to domestic prices is foreseeable.”
Author: Eric Denis , Economist