Colombia's central bank maintained its benchmark intervention rate at 4.5 percent and said recent data suggest domestic demand remains dynamic but the pace of economic growth in 2015 is expected to ease from last year due to lower oil prices.
The Central Bank of Colombia, which raised its rate by 125 basis points last year, forecast 2015 growth of between 2.0 to 4.0 percent, with 3.6 percent the most likely outcome, compared with estimated growth of 4.8 percent in 2014, the same estimate as in January.
Earlier this month the central bank's governor said the country's economy in 2016 would probably expand more than the 3.6 percent predicted for 2015.
The pass-through of the depreciation of the peso to inflation is expected to be temporary and without significant effect on inflation expectations, the central bank said, adding that the lower exchange rate would help stimulate exports and help moderate the negative impact of oil prices on the country's fiscal and external accounts.
The peso started depreciating sharply in late July 2014 but has stabilized somewhat this year although it has depreciated in the last week, hitting lows not seen since 2009.
Today the peso was quoted at 2,458.7 to the U.S. dollar, down 3.3 percent this year.
Colombia's consumer price inflation rate rose to 3.82 percent in January from 3.66 percent in December, higher than expected by the bank and markets, mainly due to a faster pace of increase in food prices.
But analysts' 1- and 2-year inflation expectations decreased and are now close to 3.0 percent, the midpoint of the central bank's inflation target.
The Central Bank of Colombia issued the following statement:
"The Board of Directors of the Central Bank of Colombia at today´s session decided to maintain the benchmark interest rate at 4.5%. This decision considered the following issues:
Regarding the international context, while the economic growth of the United States shows strength and some signs of being self-sustained, growth in the euro zone and in Japan continues weak. Some of the main emerging economies are expanding at a slower pace, or at historically lower rates. The average growth of Colombia´s trade partners will be low, but probably higher than the one registered a year ago.
Colombia's terms of trade dropped significantly by the end of 2014. In the last few weeks, oil prices and those of other commodities exported and imported by Colombia stopped falling. Part of the downturn in the terms of trade will be permanent, and will be reflected in a lower growth of national income.
In February, the risk premia of Colombia and of other countries in the region were lower, but are still higher than the average in 2014. So far this year, the information of the foreign exchange market balance shows that foreign direct investment and portfolio inflows continue dynamic.
The new information for the fourth quarter of 2014 suggests that domestic demand continued dynamic and that net exports would have subtracted more than expected from output. With this information, the forecast of economic growth for 2014 was unchanged between 4.5% and 5.0%, with 4.8% as the most likely outcome.
For 2015, the technical staff projects a growth rate between 2.0% and 4.0%, with 3.6% as the most likely outcome. This projection considers the effect of lower oil prices.
As a consequence of the strong fall in oil exports´ income and the dynamism of domestic demand, the balance of payments’ current account deficit widened. During the first three quarters of 2014, was 4.6% of the GDP, higher than the 3.3% of the GDP registered in the same period of 2013. The evolution of exports and imports during the fourth quarter of 2014 suggests at an additional widening of this deficit.
In January, inflation increased to 3.82%, higher than the projections of the technical staff and of the average of the market. The acceleration in inflation is mainly explained by the faster pace of increase in food prices. The average of core inflation measures increased four months in a row, reaching 3.22%.
Analysts' one-year and two years inflation expectations decreased and are now close to 3.0%. Those derived from public debt bonds for longer horizons also fell and are now at the top half of the target range.
The pass-through of the depreciation of the peso to the tradable component of CPI inflation is expected to continue partially and temporarily without having significant effects on inflation expectations. The higher exchange rate represents a stimulus for exports and the sectors that compete with imports and contributes to moderate the negative impact of oil prices on the country's fiscal and external accounts.
In summary, by the end of 2014, domestic demand showed dynamism close to the full use of the productive capacity. In February, inflation and its expectations are slightly over 3.0%. This takes place in an environment of deterioration of the terms of trade and of uncertainty about its evolution and its impact on aggregate demand. Having assessed the risk balance, the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered.
The Board will continue to carefully monitor the behavior and projections of the economic activity and inflation in the country, as well as those of the asset markets and the international situation. The Board also reiterates that the monetary policy will depend on the information available."