Inflation in Colombia declined for the 10th consecutive month in May, falling even further than most analysts projected to 4.37% on an annual basis. According to the figures released this week by the National Administrative Department of Statistics (DANE), inflation is now approaching the central bank’s target rate of between 2%-4% and has now fallen to less than half of the 16-year high rate of 8.97% reached last summer.
In month-over-month terms, the consumer price index rose by only 0.23% in May. This is 5 basis points below the 0.28% projection of Bancolombia and 9 points below the average analyst estimate of 0.32%, according to the Medellín-based bank.
Photo: Inflation in May dropped by more than the analyst consensus projection, with food price stabilization being the largest factor. (Credit: Jared Wade)
The larger-than-expected drop has some analysts believing that the central bank may respond with a larger cut to the nation’s key interest rate at its June meeting later this month. The central banking committee at the Banco de la República has reduced the interest rate at five of its late six meetings, but its May cut of 25 basis points was lower than its more-aggressive April cut of 50 basis points.
When scaling back the speed of the cut last month to an interest rate that now stands at 6.25%, the central bank noted that some committee members had grown concerned about the stalled improvement in inflation seen in April. While inflation, in year-over-year terms, dropped significantly early in 2017 (moving from 5.47% in January to 4.69% by March), it barely budged over the subsequent month (to 4.66%), according to DANE.
But now, after another large drop in inflation, the bank may be willing to make another 50-point reduction given that the economy now seems to have more slow-growth risks than inflationary concerns, according to Bancolombia, among others.
“Given this environment of continuity in the correction of inflation and given the economic slowdown Colombia’s facing, we believe that the leading indicators will be key to guiding the central bank’s actions in next meetings,” stated Bancolombia in a note to investors. “In our view, the degree of weakness of the economy in the second quarter will be key in determining whether the window for more pronounced cuts (50 basis points) reopens.”
Though Bancolombia is acknowledging the potential for a larger increase, it is not predicting that path. It is still projecting Colombia’s key interest rate to finish the year at 5.75% — just 50 basis points below where it currently stands.
Part of this is due to the fact that a stabilization of food prices was the largest contributor to the overall drop in inflation in May. “Food prices have recorded the greatest corrections in recent months,” stated Bancolombia, noting that this is this is another step on “a bear path of 11 consecutive months.” The recovery in food prices has gone from an annual price increase that ballooned by 15.71% last July to just a 2.09% uptick in May.
Excluding food prices and goods with regulated prices, core inflation for May came in at 5.1% year over year. For Bancolombia, this number — on top of its prediction that inflation will finish the year at 4.2% — means that the central bank may be wise to not over-react to one month of better-than-expected data. “It’s still worrying that core inflation remains above 5% and that non-tradable inflation shows no signs of reversion,” stated Bancolombia.