At its January meeting, the Colombian central bank surprised the market by reducing the nation’s key interest rate by 25 basis points to 4.5% in what the institution says will be the final move in a rate-cutting cycle that has lowered the benchmark figure by 300 basis points since December 2016.
The decision, reached by a split 4-3 vote among the seven Banco de la República board members, came as a surprise to many analysts, with 15 of the 22 polled last week by Reuters expecting the rate to remain steady. The three dissenting board members voted for no change.
Banco de la República estimates that GDP grew by just 1.6% in 2017 and maintains “uncertainty over its pace of recovery.”
In explaining the reduction, the central bank cited the 2017 annual inflation rate coming in at 4.09%, above expectations. “Except for food, all the major components of the CPI registered yearly variations somewhat greater than had been projected,” said Banco de la República in a statement. “The average of core inflation indicators increased again, reaching 4.66%.”
The central bank has projected inflation to land at 3.47% in 2018 and 3.33% in 2019.
But despite concerns that the rate has remained slightly above the bank’s 2%-4% target range, the majority still felt as though “weak domestic demand” from the fourth quarter of 2017 is significant. While the numbers are not yet final, the Banco de la República estimates that GDP grew by just 1.6% in 2017 and maintains “uncertainty over its pace of recovery.”
Still, even with the underwhelming results of the recent past and the need to cut the rate one final time, the board does see positive signs for the Colombian economy, which it has forecasted to grow by 2.7% in 2018.
The highlights have come in the form of a weakened dollar, higher external demand, and a recovery in oil prices. “Should this trend continue,” stated the central bank, “the country’s terms of trade would continue improving and, together with the better dynamics expected from external demand, would continue to favor the recovery of the country’s external income.”
With better projections ahead, in regards to higher external income, the central bank has projected that Colombia’s current account deficit — which fell to an estimated 3.5% of GDP in 2017 — will drop further to 3.3% in 2018.