At today’s meeting of the Banco de la República, the central bank of Colombia cut the nation’s key interest rate from 7.0% to 6.5%, a 50-basis-point drop that exceeded market consensus expectations.
With inflation continuing to the fall, after reaching a 16-year high in the middle of last year, the central bank had already begun a policy of rate cutting. It made 25-point cuts at three of its last four monthly meetings dating back to December, but this larger reduction signals that the bank members are now more concerned about underwhelming economic data than inflation.
“The decision by Colombia’s central bank to step up the pace of interest rate cuts at today’s meeting is a clear response to the weakness of the recent activity data,” said London-based research firm Capital Economics in a note to investors.
In a statement issued today after its decision, the Banco de la República said that indicators surrounding retail sales, industrial production, and consumer confidence “suggest a weakening of the economy in the first quarter of the year more pronounced than expected.” In response to recent data, the bank’s technical team has reduced its forecast for Colombia’s GDP growth in 2017 to just 1.8%, down from a previous prediction of 2.0%. (It does, however, continue to maintain a large range of between 0.8% and 2.6% growth for 2017.)
A similar pessimism was reflected in the recently released “World Economic Outlook” by the International Monetary Fund (IMF). While it still predicts 2.3% GDP growth for Colombia in 2017, the institution’s current forecast is a drop from the 2.7% rate it had published last October.
Colombia’s economy grew by 2.0% in 2016, the lowest rate since 2009. The IMF has predicted 3.0% growth for 2018.
The central bank added that it expects external demand to increase for Colombia in 2017 compared to last year. But “uncertainty has increased” on this front, said the bank, as well as in terms of capital flows and the price of basic goods.
Ultimately, these factors appear to have outweighed the need to reign in an inflation rate that fell again in March to 4.69%. The central bank has a target inflation rate of between 2% to 4%, and it now predicts the figure to end the year at 4.4%. It is forecasting an inflation rate of 3.5% by the end of 2018, which would mark a return to the target rate.
Colombian Finance Minister Mauricio Cárdenas said that the central bank’s decision will incentivize consumption and pump oxygen into the economy. “It should translate into an interest rate reduction for households and companies,” said Cárdenas.
The vote in favor of a larger cut was narrow, with the two bank members who voted for another 25-basis-point cut being beat out by the four voting for the 50-point decrease.
Capital Economics believes that this larger cut may become the new normal following a move that it says “was a response to the increasing signs that growth has slowed sharply since the turn of the year.”
While the statement from the central bank didn’t give clear signs of the action it will take in subsequent months, the analysts at Capital Economics see Colombia’s interest rate continuing to fall further — and perhaps faster — than most are expecting in 2016.
“Assuming the peso holds up, our sense is that policymakers will continue to move in 50-basis-point steps for now,” stated Capital Economics. “All of this supports our view that interest rates will fall by more than most currently expect. Our end-of-2017 forecast for the policy rate is 5.50%, but the risks to this are now clearly on the downside.”