Colombian Central Bank Cuts Interest Rate by 25 Basis Points to 4.75%

At its November meeting on Friday, the Colombian central bank cut the nation’s key interest rate by 25 basis points from 5.0% to 4.75%. The move is the latest in a year-long cycle that has reduced the rate by a cumulative 300 basis points as Colombia’s inflation has continued to moderate and low economic growth has become Banco de la República’s biggest concern about the economy.

The nation’s economy grew by 2.0% in the third quarter — the best quarter so far this year. But this still lagged the consensus forecast, and most analysts now predict the annual rate to come in below that figure at around 1.8%, which would be just the fourth time in decades that growth has come in below 2.0%, according to the World Bank. (Previous sub-2% years include 2009, 2001, 1999, 1982.)

At the same time, inflation did increase in October, but only slightly to hit 4.05% on a year-over-year basis. While this is above the central bank’s target range of between 2%-4%, the bank said in a statement that it expects inflation to end the year at 3.95% and close 2018 at 3.49%. Bancolombia, the nation’s largest bank, also has forecast inflation to end 2017 below 4%.

Banco de la República noted that third quarter growth was lower than the 2.3% forecast of its technical staff. “The dynamics of the domestic demand were weaker than expected,” it stated, adding that “these figures confirm the persistence of economic growth below its potential.”

The committee’s decision to lower the repo rate was in line with the expectation of Bancolombia. While projects this to be the final cut of the year, it does expect further reductions in the first six months of 2018 depending upon changes seen in other economic fundamentals.

“Our expectation is that the repo rate will end 2017 at 4.75%,” said Bancolombia in a note to investors today. “In this regard it is important to mention that the monetary authority does not rule out further cuts to the interest rate.”

The bank continues to state that, ”we reiterate our expectation that in the first half of 2018, additional cuts will be made to complete the expansive cycle of monetary policy. From 4.75% at the end of 2017, the board will discuss the pace and magnitude of additional cuts that complete the path of cuts, whose terminal level, according to our estimates, would be 4.25% in 2018.”

Share your thoughts:

comments