The Central Bank of Colombia, which raised its rate by 125 basis points in 2014 to curb inflation, added that it expects the country's economy in the second quarter to expand at a pace that is similar to the first quarter, with the drop in oil prices and other commodity prices that are exported having a negative impact on national income, partly explaining the "sharp devaluation" of the peso's exchange rate.
Colombia's economy expanded by 0.8 percent in the first quarter from the fourth quarter and on an annual basis Gross Domestic Product grew by 2.8 percent, down from 3.5 percent in the fourth quarter and the lowest annual growth rate since the fourth quarter of 2012.
For 2015 the central bank lowered its growth forecast to 2.8 percent from a previous forecast of 3.2 percent, adding growth could be in a range of 1.8 to 3.4 percent. In 2014 GDP grew 4.8 percent.
The central bank noted that inflation remained relatively stable in June and inflation expectations one and two years ahead remain around the bank's midpoint target of 3.0 percent.
Colombia's inflation rate rose marginally to 4.42 percent in June from 4.41 percent in May, above the central bank's upper limit of 4.0 percent.
Colombia's peso has been depreciating for the last 12 months, with the pace accelerating from May. Today the peso was trading at 2,880 to the U.S. dollar for a decline this year of 17 percent.
Last month Colombia's finance minister, Mauricio Cardenas, was quoted as saying policymakers expect inflation to slow toward the end of the year and are not considering any rise in interest rates, with the rise in inflation due to short-lived supply shocks, particularly to potatoes and rice.
The Central Bank of Colombia issued the following statement (translation by Google):
"The Board of the Central Bank at its meeting today decided to keep interest rates at 4.5% intervention. In this decision, the Board took into account mainly the following aspects:
- Annual consumer inflation (4.42%) remained relatively stable in June. The average of the four measures of core inflation (4.14%) increased for the ninth consecutive month. Inflation expectations of analysts to one and two years and those arising TES 2, 3 and 5 years continue around 3%.
- The slower growth in food supply, transmission nominal depreciation consumer prices and the increase in costs of imported raw materials, largely explain the acceleration in inflation.
- The depreciation of the peso and the persistence of El Niño may postpone the convergence of inflation to the target directly and by activation of indexation mechanisms.
- In the United States the records of the first half of 2015 showed a moderation in the growth rate compared to the second half of 2014. The euro area and Japan maintained a slow recovery while China's economy has slowed a little more than expected. Latin American economies grow larger at low or negative rates. These results have affected external demand for weaker than the estimated one quarter behind Colombian producers.
- The agreement between Greece and its creditors significantly reduced global risk aversion. The dollar continues to strengthen and expects the Federal Reserve increased US interest rates this year.
- The international oil price dropped like other commodity prices exported by Colombia. The decline in the terms of trade has a negative effect on national income and partly explains the sharp devaluation of the peso against the dollar.
- In Colombia, given the indicators of retail, consumer confidence and trade, economic expectations, import, and to developments in foreign demand for domestic goods and services, technical team estimates that economic growth for the second quarter of 2015 would have been similar to that recorded in the first. For all 2015, the most likely figure was revised from 3.2% to 2.8%, contained in a range between 1.8% and 3.4%.
In short, inflation remains above the upper limit of the target range and domestic spending in the economy continues to adjust to the lower dynamics of national income. It is expected in the horizon of monetary policy action temporary price shocks are reversed in an environment of inflation expectations anchored at the finish. However, the recent depreciation of the peso could delay the convergence of inflation to the target.
The Board will continue to carefully monitor the behavior and projections of economic activity and inflation in the country, asset markets and the international situation. It reiterates also that monetary policy will depend on the information available."