Colombia’s Central Bank Holds Interest Rate at 7.75%, Halting a Year-Long Rate-Raising Trend

Colombia’s central bank today voted to maintain the nation’s interest rate at 7.75%, reversing a year-long trend in which rates had been raised for 11 consecutive months. Since September 2015, the Banco de la República had pushed the interest rate up by 325 basis points to curb out-of-control inflation, which continually hit 16-year highs despite the ongoing intervention.

The inflation rate currently sits at 8.97%, something largely attributed to high food prices caused by the damage a severe El Niño cycle did to crops and a 45-day trucker strike that crippled the country’s transport network early this summer.

“In the following months, the normalization of the climate and agricultural supply should generate a decline in food prices, especially perishable goods,” said Banco de la República in a statement.

In line with disappointing economic growth in the second quarter, the bank noted that the rest of the year will remain challenging for Colombia. It is now projecting growth among the nation’s key trading partners that is even lower than its underwhelming estimate last month. Oil prices, too, remain unhelpful, while other commodity prices relevant to Colombian exports have fallen further.

The second quarter economic growth rate of 2.0% was well under the Banco de la República’s 2.6% forecast. As such, its outlook on the rest of the year has gotten gloomier. “These figures, along with new records of economic activity in the third quarter, suggest a downward bias in the growth projection in 2016,” said the central bank.

In reacting to the news, London-based research firm Capital Economics — which was in the minority that expected another rate raise today —  said that the central bank now appears to have changed its focus. “The key message here is that concerns about the outlook for growth have overtaken worries about inflation and the balance of payments,” said Capital Economics in a note to investors.

The good news comes in the form of the account deficit. The central bank said that foreign trade figures for the second quarter have led the technical team to project a deficit of $15 billion USD, or 5.3% of GDP. This is “lower than initially expected,” said the bank.

Inflation is also projected to begin reversing soon. El Niño and the trucker strike have ended, and “this, together with monetary policy actions taken so far, should bring inflation into the target range in 2017,” said the Banco de la República.

Unlike the July meeting, in which the vote to raise the rate by 25 basis points came in split at 4-3, the committee was near unanimous on taking no action this time. Six of the seven members voted for no intervention. The final member advised a 25-point raise.