Colombia: Central Bank stays put for second straight month
September 30, 2016
The seven-member board of the Central Bank (BanRep) unanimously decided to keep the reference interest rate unchanged at 7.75% at its 30 September monetary policy meeting. The decision was in line with market expectations and represented the second straight month at which BanRep kept the rate on hold. Last month, the Bank ended a year-long tightening cycle, during which it had increased the rate by a cumulative 325 basis points in an effort to combat stubbornly high inflation.
The decision to hold rates comes after the inflation rate plunged in August by the most in seven years to 8.1%, following a 9.0% peak in July. According to the Bank’s official statement, the slowdown in inflation is expected to continue now that the effects of a prolonged drought, a truckers’ strike and the weakening of the peso are fading out. BanRep projects that inflation will converge to its tolerance margin of plus/minus 1.0 percentage points around its 3.0% target.
BanRep acknowledged that that the average growth of Colombia’s main trading partners in 2016 will probably be lower than estimated a month ago, while it stills expects the U.S. to slowly tighten its monetary policy. On the domestic front, the Central Bank expects subdued growth in Q3 as a result of the recent 45-day truckers strike, suggesting a downside risk to its 2.3% growth forecast for 2016. On a more positive note, the statement underlined that the current account deficit continued to narrow in Q3, which should help reduce the country’s vulnerability to external shocks. Likewise, Colombia’s terms of trade have improved owing to higher oil prices.
As usual, BanRep stated that it will continue to monitor Colombia’s macroeconomic stability and that it remains committed to keeping both inflation and expectations anchored to their target range. The next meeting is scheduled for 30 November.
Author: Luis Lopez Vivas, Economist