Colombian Central Bank Surprises Market by Cutting Interest Rate by 25 Basis Points to 5.0%

The central bank of Colombia today lowered the nation’s key interest rate by 25 basis points from 5.25% to 5.00%. The move continues a year-long rate-cutting trend but surprised the market consensus, which expected the Banco de la República to leave the rate steady for the second straight month.

After making the unexpected move, the committee, which voted 5-2 in favor of the cut, with the two dissenting voices calling to hold the rate, said in a statement that “this reduction should not be understood as part of a continuous path of cuts.”

In explaining its rationale, the bank’s committee noted an economic growth rate that remains below the nation’s potential. The committee did cite some positive metrics regarding a recovery in external demand, terms of trade, and oil prices. But it is maintaining its underwhelming 1.6% projection for Colombia’s GDP growth in 2017. (The trends for economic fundamentals have been encouraging enough, however, for the central bank to increase its 2018 forecast from 2.4% to 2.7%.)

Such concerns about weak economic expansion continue to supersede worries about inflation, which increased, year-over-year, to 3.97% in September. But this slight increase, from 3.87% in August, can be explained by an increase in food prices, according to the bank, which stated that “basic inflation continued to fall.”

Moreover, the overall inflation rate still remains within Banco de la República’s target range of between 2%-4%. The committee projects inflation to end 2017 just outside that band, at 4.07%, and close 2018 at 3.58%. This is in line with Medellín-based Bancolombia’s forecast of 4.0% and 3.5%, respectively, to end 2017 and 2018.

The committee also continues to expect further reduction in Colombia’s current account deficit. As a percentage of GDP, the current account deficit rate came in at 4.4% last year, and the central bank expects it to end 2017 at 3.7%. This is near the 3.8% projection made this week by New York-based rating agency Fitch Ratings. Banco de la República today said that this downward trend “is expected to continue,” and Fitch also called the government’s target of 3.1% in 2018 “credible.”

Most analysts had projected that the key interest rate would be reduced to 5.0% over the medium term despite expectations that it would remain at 5.25% until at least next month. But Banco de la República “has a history of surprising the market, and today’s decision to lower interest rates by 25 basis points to 5% follows in that tradition,” wrote London-based Capital Economics analyst Neil Shearing in a note to investors. “All 17 analysts in the Reuters survey — including us — had expected rates to be left unchanged at 5.25%.”

Bancolombia, the largest bank in Colombia, had also projected no reduction to be made today. But the financial institution has been anticipating one more cut before year end that would leave the rate at 5.0% at the close of 2017. With two meetings left before year-end — and the central bank asserting that today’s move won’t necessarily represent a “continuous path of cuts” — that forecast may still come to pass.