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colombia central bank colombia inflation banco de la republica inflation colombia interest rate banco de la republica

Colombia’s Central Bank Members Remain Divided on Inflation Risk

Posted On December 30, 2016
By : Jared Wade
Comment: Off
Tag: banco de la republica, central bank, inflation, interest rate

Colombia’s central bank remains divided about the current inflation risk facing the country. While the committee cut the nation’s benchmark interest rate for the first time in more than a year earlier this month, the vote included dissent from three of seven members who felt that the economy still lacks “strong enough signals” that inflation is adequately falling back towards target levels.

The dissenting members feared lowering the rate — which dropped from 7.75% to 7.5% — before more data comes in given the potential fallout that changes in U.S. and European monetary policy may have on the Colombian peso and external financing rate in the coming months.

“They held that it would be prudent to keep the benchmark rates stable, considering there would be relevant information on the aforementioned risks next month,” according to minutes of the last meeting released by Banco de la República yesterday.

This desire to wait and not rush action was further backed up by beliefs about the account deficit and the ongoing effects of the central bank’s recent change in policy. “They do not consider the adjustment of domestic demand and growth to be excessive, considering that the current account deficit is still high, for which they believe the behavior of theses variables is part of the adjustment process,” stated the minutes.

In line with the majority view, however, the 25-basis-point reduction represented a reversal of policy. The previous four meetings held the rate steady at 7.75% following 11 straight months of rate increases that came while inflation spiked throughout Colombia. In July, in the wake of a 45-day trucker strike, inflation hit 8.97%, the highest level since 2000.

But it has begun to fall steadily, coming in at 5.96% in November, and that has convinced most committee members that the worst is now in the past. While this figure remains well above Banco de la República’s target range of between 2% and 4%, the progress seen was enough for four of the seven-member committee to vote for a rate cut.

The majority was more concerned by the interest rate remaining high compared to historical standards, according to the minutes. They also highlighted the financial market response to the U.S. Federal Reserve rate cut, which limits the potential exchange rate downside for the peso.

For these and other reasons, the four members who voted to cut the interest rate felt it prudent to start looking forward. They “noted the importance of pursuing an anticipatory monetary policy, given the lags between policy actions and their effects on domestic demand and inflation,” per the minutes.

Committee members did agree on some matters. While admitting that fourth-quarter economic data remained scarce at mid-month, the committee was unified in recognizing that they are “anticipating that economic activity is expanding at a slightly faster pace than in the third quarter.” They continue to project final GDP growth rate of between 1.5% and 2.0% for 2016, with 2.0% being the most likely result.

The oil rebound and agreement by many producing nations to cut production also mean that “the country’s terms of trade would have continued to improve.” The committee believes that the Colombian peso, like other emerging market currencies has corrected “following the strong changes observed after the U.S. presidential elections.”

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About the Author
Jared Wade is editor in chief of Finance Colombia. He is a Bogotá-based journalist with 15 years of experience covering topics including business, financial services, Latin America, and sports. Email him at jared.wade(at) financecolombia.com or follow him on Twitter at @Jared_Wade.
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