Colombian Central Bank Lowers Interest Rate to 7.25%

Colombia’s central bank today decided to lower the nation’s benchmark interest rate by 25 basis points from 7.5% to 7.25%. This is the second time in three months that the Banco de la República, which named Juan José Echavarría as its new general manager in January, has opted to cut the rate, a policy reversal from the hikes that began in mid-2015.

The majority of the board members felt that stabilizing inflation, which fell for the sixth straight month in January, warranted another drop in the rate. In a statement, the bank acknowledged that analyst inflation projections for December 2017 still remain above its target range of 2% to 4%, but said that “supply shocks that diverted inflation from its target continue to fade.”

Photo: The central bank took no action during its first meeting under new boss Juan José Echavarría in January, but after seeing a sixth straight month of falling inflation, the committee voted 4-2 to cut the rate. (Credit: Banco de la República)

The committee also expects rising external demand in 2017, but its economic growth prediction for this year continues to include a wide variance. Though its baseline projection is a GDP expansion of 2.0% — the same that Colombia achieved in 2016 — the bank’s optimistic scenario is 2.7%. It sees a downside that could put growth as low as 0.7%.

Other factors in the Banco de la República’s decision include the general weakness of economic activity and the risk of an excessive deceleration; uncertainty about the speed of convergence of inflation to its target; and the fact that the current level of the real policy interest rate is contractionary.

Despite cutting the rate this month, the bank appears to not want to tip its hand about whether it will take similar action again at its March meeting. “The new information on inflation, economic activity, and the international context will determine the pace of policy normalization,” said the central bank in a statement.

The central bank, under previous long-time leader José Darío Uribe, had previously hiked the rate repeatedly in recent years to combat rising inflation. The committee agreed to raise the rate for 11 consecutive months, taking it from 4.5% in September 2015 to a high of 7.75% in August 2016, before deciding to hold the line as inflation began to come down from the 16-year high it hit last summer.

The central bank then made its first rate drop, from 7.75% to 7.5%, in December. But in the first meeting of the new year, and the first after Echavarría took the helm, the bank took no action. The market, both in Colombia and abroad, will now continue speculating on whether the committee, which agreed today cut the rate by a 4-2 vote, will do the same again next month.