At its monthly meeting on the last day of August, the central bank of Colombia voted to lower the nation’s key interest rate by 25 basis points to 5.25% due to ongoing economic weakness.
This expected cut equals the 25-point reduction in July and marks the eighth time in the past nine months that the Banco de la República has taken action. The current cutting cycle has now dropped the benchmark interest rate from a high of 7.75% last November to its current 5.25%.
The Banco de la República’s committee members continue to feel comfortable making cuts in an attempt to spark the economy given the ongoing drop in inflation, which has fallen back within the bank’s target range of between 2%-4%. In July, year-over-year inflation stood at 3.4% — a major turnaround from the 16-year high of 8.97% seen a year earlier.
The bank is still projecting an mild uptick in inflation in the final months of the year, forecasting a year-end inflation rate of 4.16% for December 2017.
Bancolombia, the nation’s largest bank, believes inflation has already begun to rise. It is projecting the August figure to come in at 3.79% before ending the year at 4.2%.
But the larger concerns for the central bank continue to reside with overall economic output in a year when Colombia is likely to register GDP growth below 2% for the first time since 2009. The economy grew by just 1.3% in the second quarter, a figure that was “close to the technical staff’s estimate,” said the bank in a statement.
The Banco de la República stated that its decision to cut the interest rate was impacted by the “weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the dynamics of income due to the fall in oil prices.”
The bank added that “the dynamics of household spending remained weak,” “gross capital formation growth was low,” and “net exports subtracted more than estimated from growth due to the increase in imports.”
The bank did acknowledge, however, that “the available figures of economic activity suggest that the slowdown of the economy has bottomed out, and that higher growth can be expected during the second half of the year.”
Four of the board’s seven members supported the 25-point cut. Two voted for a 50-point reduction, while one preferred no intervention this month.
Neil Shearing, chief emerging markets economist at London-based research firm Capital Economics, highlighted the importance of two members voting for even deeper cuts. In part for this reason, Capital Economics has predicted that the interest rate in Colombia will end the year at 4.5%, a forecast below the market consensus.
“It’s clear that there is support among some board members for additional policy loosening to help the economic recovery,” he wrote in a note to investors. He added that “none of the board members voted for a 50-basis-point cut at last month’s meeting.”
The 25-point cut in August was in line with Bancolombia’s prediction. The Medellín-based bank forecasts the interest rate to end 2017 at 5.0%. “We reiterate our 5% forecast for the repo rate this year,” stated the bank in an investors note before yesterday’s meeting. “This would occur after two 25-basis-point cuts — one this month and another over the end of the year — depending on the degree of recovery evidenced by the economy in the second half.”