Colombian Central Bank Cuts Benchmark Interest Rate Further to 4.25%

Following two months of speculation as to whether further intervention was warranted, the Colombian central bank yesterday reduced the country’s benchmark interest rate by 25 basis points to 4.25%.

The Banco de la República began its rate-cutting cycle in December 2016 and governor of the bank’s board, Juan José Echavarría, had previously said that committee members believed that “the cycle of rate reductions had been completed” following its move earlier this year to lower the rate to 4.5%.

But inflation continued to drop in the interim — falling to 3.14% in March — while economic recovery remains uncertain given the upcoming presidential election and global factors, such as the sustainability of higher oil prices, volatility in the exchange rate of the peso, and the potential for a trade war between the United States and China to negatively affect markets.

After lowering the rate, the seven-member central bank board cited the “weakness of the economic activity and uncertainty over its pace of recovery” for its anonymous decision to drop the rate from 4.5% to 4.25%.

While highlighting that some recent metrics indicate a reason for optimism for economic recovery this year, meager growth remains the primary concern about the Colombian economy.

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“The economic activity indicators available so far this year suggest that the economy would have continued with a low growth, albeit higher than in 2017,” stated the board. “With these results, the technical staff of the central bank maintained its growth estimate for 2018 at 2.7% … [and] the preliminary estimate of the technical staff for GDP growth in 2019 is 3.7%.”

The Banco de la República added that it is now expecting the interest rate to end this year 3.37% and fall further to 3.16% by the end of 2019. The central bank’s target range for inflation is between 2%-4%.