Colombia’s central bank announced last week that it is once again not taking any action on interest rates and will hold the line at 7.75%. It’s August decision to leave the rate unchanged was a departure from 11 straight months of intervention that continued to hike the rate to combat spiking inflation.
But, now, with the worst of the inflation over — food prices were the biggest culprit and have come back under control — the Banco de la República is confident that no more work needs to be done. The vote was unanimous.
While price inflation had been seen in most consumer goods throughout 2016, food costs were sent skyrocketing earlier this year as an El Niño-induced drought hurt harvests and a 45-day trucker strike crippled key sectors of Colombia’s transport network. Both are long over now, however, and inflation started to reverse course last month, falling from the 16-year high of 8.97% to a still-high, but easing, 8.1%. The rate of fall even beat the consensus expectations.
The central bank, the nation’s largest bank Bancolombia, London-based research group Capital Economics , the International Monetary Fund, and others all expect the decline to continue. By the end of 2017, the central bank hopes inflation can be back within its target range of 2%-4%.
For this reason, the market is generally expecting the interest rate to remain unchanged for the rest of the year, after which a period of rate cutting should begin. This all depends upon the inflation continuing to drop and other orderly developments in the economy, which could be thrown out of whack by the now-defunct peace accord with the FARC and pending uncertainty around tax reform.
A change in the Banco de la República also leaves room for the unexpected. “Monetary policy decisions will not be unrelated to changes in the board of the [central] bank,” wrote Bancolombia in a note to investors. “Indeed, we believe that the appointment of a new director and co-director of the board in the coming months may postpone a change of course in monetary policy. For all the foregoing reasons, we reiterate our expectation that the cycle of cuts in the repo rate will only start in January and will run until October 2017, with an end level of 5.25%.”
The central bank’s meeting also featured positive news on the account deficit front. It revealed that the first half of 2016 saw the current account deficit drop by 1.5 pps to hit 4.8% of GDP.
“This result, together with the most recent figures of foreign trade, led the monetary authority to consider that the full-year negative balance may be lower than the 5.3% of GDP projected a month ago,” stated Bancolombia. “Although this is a step forward, in the press conference after the meeting, the bank’s director stressed that this is still a high level of external imbalance.”