It is the first rate cut by the Central Bank of Colombia (CBC) this year following 9 cuts in 2017, with the most recent cut in November. The decision to cut the rate by the bank's board was narrow, with four members voting for a cut while the other three members voted to maintain the rate.
The central bank has now cut its rate by 325 basis points since December 2016 when it embarked on its current easing cycle. The decision to maintain the rate in December 2017 was unanimous.
"After assessing the risk balance of the weakness of the economic activity and its expected recovery and the pace of convergence of inflation to its target, the Board deemed appropriate to reduce the benchmark interest rate to 4.5%," the bank said in a decision that expected by some, but not all economists.
"Some indicators suggest that at this level the monetary policy stance is slightly expansionary. With the information available, the Board considers that the reduction cycle of the interest rate has been completed," the CBC added.
Colombia's growth in the third quarter of 2017 disappointed with an annual rate of 2.0 percent but this was up from 1.2 percent and 1.3 percent in the preceding quarters.
Data for the fourth quarter confirm that domestic demand remains weak, with the central bank maintaining its growth forecast of 1.6 percent for the full year.
For 2018 growth is seen accelerating to 2.7 percent, helped by faster external demand, the impact of past rate cuts, investments in civil works, resulting in better use of capacity.
But the CBC stressed the uncertainty behind its growth forecast, with investments and national income set to rise if oil remains at the current level for a prolonged period of time. With a recovery of oil prices, Colombia's terms of trade and external income are continuing to improve, leading to a forecast of a current account deficit of 3.3 percent in 2018, down from an estimated 3.5 percent in 2017.
Colombia's inflation rate was largely steady at 4.09 percent in December from 4.12 percent in November, with analysts' forecasts for 2018 and 2019 at 3.47 percent and 3.33 percent, respectively.
But the CBC said a less-than-favourable behavior of some components of CPI showed there was a risk that inflation might be slower than expected to converge to target. But inflation is still expected to fall in coming months as the impact of lower taxes at the start of 2017 dissipates.
The Central Bank of Colombia issued the following statement:
"The Board of Directors of Banco de la República, in its meeting today, decided to reduce the benchmark interest rate by 25 bp, placing it at 4.5% For this decision, the Board mainly took into account the following aspects:
- In December, yearly inflation fell less than expected, reaching 4.09%. Except for food, all the major components of the CPI registered yearly variations somewhat greater than had been projected. The average of core inflation indicators increased again, reaching 4.66%.
- Inflation expectations recorded slight changes. Those by analysts to December 2018 and 2019 stand, on average, at 3.47% and 3.33%, respectively. Those embedded in public debt bonds remain above 3.0%.
- Inflation and core inflation are expected to decrease in the coming months, partly due to the dissipation of the effects of the increases in indirect taxes at the beginning of last year.
- External demand continues to recover, driven by developed economies and by the major emerging economies. The US dollar has depreciated vis-à-vis most other currencies, and the risk premia in the region, including Colombia, have reduced. Oil prices increased again, reaching levels higher than the averages registered in the last two years. Should this trend continue, the country's terms of trade would continue improving and, together with the better dynamics expected from external demand, would continue to favor the recovery of the country’s external income.
- Due to the higher external income, the technical staff reduced their estimation of the current account deficit from 3.7% to 3.5% of GDP in 2017; additionally, it forecasted that it would continue reducing to 3.3% in 2018.
- The new figures for the country's economic activity in the last quarter of 2017 confirm a weak domestic demand, with which the Central Bank’s technical staff maintained its growth forecast at 1.6% for 2017. For 2018, its growth forecast is 2.7%. The increase in the growth rate would be supported by the acceleration of external demand, the effects of the previous reductions in interest rates, and investment in civil works, among other factors. However, according to this forecast, the underuse of the installed capacity would broaden this year.
Based on this information, the Board considered the following factors for its decision:
- Weakness of the economic activity and uncertainty over its pace of recovery. Should the price of oil remain at current levels for a prolonged period, investment in the sector would increase and national income would improve. However, uncertainty on the persistence of these shocks is high.
- The less-favorable behavior registered in some groups of the CPI vis-à-vis the forecast by the technical staff, and the risk that convergence of inflation to its target be slower than expected. Weakness of demand and the exchange-rate effect of the country's terms of trade would alleviate this risk. However, uncertainty on these events is high.
In this context, after assessing the risk balance of the weakness of the economic activity and its expected recovery and the pace of convergence of inflation to its target, the Board deemed appropriate to reduce the benchmark interest rate to 4.5%. Some indicators suggest that at this level the monetary policy stance is slightly expansionary. With the information available, the Board considers that the reduction cycle of the interest rate has been completed.
The Board will continue to carefully monitor the behavior of inflation and the forecasts for economic activity and inflation in the country, as well as the international context. Finally, the Board reiterates that the monetary policy will depend on the availability of new information.
The decision to reduce the benchmark interest rate by 25 bp was approved by four (4) members of the Board. The three (3) remaining members of the Board voted to keep it unaltered."
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