Colombia’s Central Bank Cuts Interest Rate by 25 Basis Points to 6.25%

Colombia’s central bank cut the nation’s key interest rate by 25 basis points to 6.25% at yesterday’s monthly board meeting. This marks the fifth time in the last six months that the Banco de la República members have voted to cut the rate as last year’s high inflation continues to moderate and the larger concern moves to encouraging economic growth.

Colombia’s economy grew by just 1.1% in the first quarter of 2017, below Banco de la República’s 1.3% projection. In explaining its rate cut, the bank also stated that “economic activity indicators so far would suggest a slow dynamic for the second quarter.”

Though the 25-point rate cut was in line with the consensus prediction of analysts surveyed by Reuters, it was a smaller reduction than last month’s 50-point cut. While the decision to decrease the rate was unanimous among the seven-member board, the 25-point cut narrowly won with a 4 to 3 vote. The dissenters all preferred another 50-point reduction.

“Colombia’s central bank didn’t provide much of an explanation for its decision to slow the pace of interest rate cuts to 25 basis points at this month’s policy meeting, but our sense is that it may have been spooked by April’s inflation data, which were a touch stronger than expected,” said Neil Shearing, chief emerging markets economist at London-based analyst firm Capital Economics, in a note to investors.

While inflation remains less than half of the 16-year high of 8.97% hit last summer, the drop toward the central bank’s target range of between 2%-4% has stalled. The year-end inflation projection from market analysts for December 2017 now stands at 4.5%, a small but significant uptick from the 4.45% estimate reported in April.

Thus, the central bankers now appear to be trying to walk the middle ground between a continuing inflation drop and growth that “remains below the country’s productive potential,” according to report issued by Bancolombia before the decision.

Despite the sluggish economic expansion, Bancolombia said that, “from the perspective of growth, we do not consider that a cut above 25 basis points is justified at this moment.” It projects that the bank will continue on a cautious path, making only another 50-point cut cumulatively for the rest of the year to end 2017 at 5.75%.

Capital Economics, however, sees a potential return to larger cuts later in the year and a year-end rate of 4.5%. The firm notes that this estimate is “well below the current consensus,” but it believes that “Colombia’s central bank still has more work to do.”

The central bank has now cut the nation’s key interest rate from a high of 7.75% to 6.25% since it made its first decrease of a new easing cycle in December 2016. It currently is predicting Colombia’s GDP to grow by just 1.8% in 2017, below the 2.3% predicted by the International Monetary Fund in April and the government’s target range of 2.5%.