The Central Bank of Colombia cut its key intervention rate by another 25 basis points to 5.50 percent, as expected, and has now cut it by 200 basis points this year and by 225 basis points since beginning on an easing cycle in December 2016.
One member of the bank's board of directors voted to keep the rate steady while the other six members voted in favor of the rate cut. As in previous months, the central bank said the current real interest rate was contractionary.
While the central bank has been trying to boost economic activity and reduce excess capacity in the economy by lowering rates, Colombia's inflation rate in June finally dropped into the central bank's target range for the first time since January 2015.
Headline inflation eased to 3.99 percent from 4.37 percent in May, within the central bank's target range of 2 -4 percent. Analysts' inflation expectations for December 2017 and 2018 also fell further to 4.28 percent and 3.52 percent, respectively.
In May the International Monetary Fund forecast end-2017 inflation of 4.1 percent compared with end-2016 inflation of 5.75 percent.
The fall in inflation has been helped by a slowdown in food prices and a relative stable exchange rate but the central bank cautioned that the decline in food prices may reverse in the second half of the year so inflation is forecast to increase slightly in the period.
Colombia's peso was trading around 3,012 to the U.S. dollar today, down 0.3 percent this year.
Colombia's economy shrank by 0.2 percent in the first quarter of this year from the previous quarter and the central bank said recent data suggested that output in the second quarter would be similar to the first quarter although domestic demand was "somewhat better" than three months ago.
On an annual basis, Colombia's Gross Domestic Product rose 1.1 percent in the first quarter of this year, down from 1.6 percent in the previous quarter.
The IMF has forecast 2.3 percent GDP growth this year, up from 2.0 percent in 2016.
The Central Bank of Colombia issued the following statement:
"The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 5.5%. For this decision, the Board mainly took into account the following aspects:
- In June, annual consumer inflation stood at 3.99%, and the average of core inflation indicators posted at 5.09%. These figures are lower than those registered a month ago. Analysts’ inflation expectations to December 2017 and 2018 lowered, reaching 4.28% and 3.52%, respectively. Those embedded in public debt bonds recorded modest changes, and are slightly above 3.0% for 2018.
- The effects of the strong transitory supply shocks that deviated inflation from its target continue to fade. This is suggested by the slowdown in the food CPI and the behavior of the prices which are more sensitive to the exchange rate. The average of core inflation indicators declined more slowly as a consequence of the indexation of prices and the effect of the transitory increase in indirect taxes.
- The contribution of food CPI to the decline in annual inflation may reverse during the second half of this year. For this reason, forecasts indicate that annual inflation could increase slightly in that period.
- Forecasts for the price of oil and the terms of trade for the rest of 2017 lowered, but continue to reflect increases versus the averages recorded in 2016. External demand remains weak, and its growth is expected to be somewhat higher than the figure registered a year ago. In the last month, country risk spreads were relatively stable, and the peso depreciated vis-à-vis the US dollar.
- Recent figures of economic activity for the second quarter suggest that output would have grown at a low rate, similar to the one recorded in the first quarter. The dynamics of domestic demand would have been weak, although somewhat better than three months ago. Net exports would have been similar to those of the first quarter of 2017.
Based on this information, the Board considered the following factors for its decision:
- The increasing 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. Recent indicators confirm an excess capacity of the economy, although its magnitude is highly uncertain.
- Uncertainty about the pace of convergence of inflation to its 3.0% target. Indexation mechanisms and the persistence of inflation continue to be reflected on core inflation indicators, which exceed the inflation target (3.0%).
- The current level of the real policy interest rate ex-ante is contractionary.
With this, the Board of Directors decided to reduce the benchmark interest rate by 25 bp. The decision to reduce the benchmark interest rate was approved by six (6) members of the Board. The remaining member voted not to modify the benchmark interest rate."
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