With Colombia’s inflation rate dropping further than expected in May, the head of the nation’s central bank acknowledged this week that kick starting economic growth may require ongoing cuts to the interest rate.
Photo: “The economy is slowing down or not growing much, and on the inflation side we have good news but not good enough,” said Juan José Echavarría, head of Colombia’s Banco de la República. (Credit: Banco de la República.
Colombia’s key interest rate currently stands at 6.25% after five reductions in the past six months dropped it from a high of 7.75% last December. The largest single reduction, of 50 basis points, came during the committee’s April meeting, but this was moderated in May. Though three dissenting voters called for a second consecutive 50-point drop, the four-member majority won out with a 25-point cut.
More recently released inflation data, however, showed more improvement than expected to the consumer price index in May. Analysts at the Medellín-based Bancolombia and other organizations responded by telling investors that they now believe that the Banco de la República may be more aggressive at its next meeting, perhaps issuing another 50-point cut.
Interest Rate Predictions
Despite that possibility, Bancolombia’s most recent forecast predicted that the central bank will only cut the rate by 50 more basis points throughout the remainder of the year — half of what Echavarría is now hoping to achieve.
Even with the need to spur economic growth after the disappointing 1.1% GDP expansion results in the first quarter, Bancolombia still has concerns remains about core inflation data and the possibility that the current path toward food price stabilization could grow choppy.
The head of the Banco de la República shares these sentiments. “On the growth side the economy is slowing down — or not growing much — and on the inflation side we have good news but not good enough,” Echavarría told Reuters.
While Bancolombia is predicting the interest rate to end the year at 5.75%, the London-based research group Capital Economics has forecasted more drastic measures with a move down to 4.5%. This is below even Echavarría’s “hope” of getting down the interest rate down to 5.25%.
While Capital Economics stated in May that its estimate is “well below the current consensus,” the firm’s analysts said that “Colombia’s central bank still has more work to do.”
Inflation Continues to Fall
The annual inflation rate hit a 16-year high of 8.97% last summer, but it has dropped considerably over the past year. Then, after barely moving from March to April, decreasing slightly from 4.69% to 4.66%, the May number showed more progress with a drop to 4.37%.
The Banco de la República’s target range for inflations is between 2%–4%, with the midpoint of that window being the figure that Echavarría would like to reach.
“My bigger concern is always inflation because we are still far from 3%,” Echavarría told Reuters. “If we want to be close to 3%, this is not going to be very easy. So I fear we will be on the restrictive side most of the time.”
At the time of the Banco de la República’s last meeting in late May, the market consensus had projected Colombia’s inflation rate to close the year at 4.45% and then reach 3.57% by the end of 2018.