Colombia’s Central Bank Lowers Interest Rate to 7.5% as Economic Slowdown Worries Eclipse Inflation Concerns

In a surprise move that divided the committee, Colombia’s central bank today lowered the nation’s interest rate to 7.5%, down 25 basis points from the 7.75% figure that it had held since July. The decision, in a four-to-three split decision among the seven-member committee of the Banco de la República, was based on worries that the economic slowdown may now be a larger concern than inflation.

Inflation fell again in November, dropping to 5.96% just a few months after spiking to a 16-year high of 8.97% in July. The bank said in a statement that its analysts now expect inflation to moderate further to 4.36% next year, near the high end of its target range of between 2% and 4%.

Thus, the Banco de la República is now looking to weather the problem of low growth, something that is now becoming a real concern in all sectors of Colombia. The most recent economic expansion numbers have come in under market predictions, and sluggish fourth quarter activity means 2016 growth could finish below 2%.

“In the third quarter, the Colombian economy expanded 1.2% yearly, a figure lower than expected by the technical staff at Banco de la República and by the market,” said the central bank in a statement. “Domestic demand fell 1.1% due to lower investment and the slowdown in consumption. These results and the new figures of economic activity for the fourth quarter suggest that economic growth in 2016 could be slightly lower than 2.0%.”

It noted that global economic activity also remains weak — showing signs of only a slight recovery in 2017. The rally in oil prices should be good news for Colombia, but monetary policy tightening in the United States means that officials in Bogotá may have to contend with a strengthening dollar in the coming months.

The bank highlighted that its action in early 2017 will hinge on how Colombia’s economy reacts to all these factors. “Future policy decisions will depend on new data, on the speed of convergence of inflation to the target, and the intensity, nature, and persistence of the economic slowdown,” said the bank.

It added that, “the board will continue to monitor the adjustment of expenditures and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, the macroeconomic stability.”

In order to fight inflation that began to climb during the middle of last year, the central bank raised the interest rate for 11 straight months beginning in September 2015. That intervention pushed the rate up by 325 basis points, to 7.75%, in less than a year, before four months of inaction that preceded today’s rate cut.