But the Central Bank of Colombia, which has maintained rates this year after cutting them by 125 basis points last year, added that the pass-through of the devaluation of the peso on prices along with an intensification of the El Nino effects could delay such a convergence of inflation.
Earlier this month the central bank's president Jose Dario Uribe told a Colombia newspaper that he believes inflation this year will average 4.5 percent, above the initial forecast of 3.0 percent, mainly due to the impact of the peso's depreciation but also because drought caused El Nino has meant that more food products than normal are being imported.
The peso has been depreciating since May this year and was trading at 3,105 to the U.S. dollar on Friday, down 23 percent since the start of this year.
The central bank targets inflation at a midpoint of 3.0 percent within a range of 2 - 4 percent.
Colombia's inflation rate rose slightly to 4.46 percent in July from June's 4.42 percent, with the central bank attributing the rise in inflation to the pass-through of the lower peso to consumer prices and the rise in cost of imported materials along with lower food supply.
Domestic demand in Colombia continued to weaken in the second quarter, the central bank said in a statement from Aug. 21, citing recent data for retail sales, consumer and retail confidence, and economic expectations. Industry is also contracting and indicators for the construction sector suggest a slowdown.
However, the central bank's staff still maintained its forecast for 2015 growth in a range of 1.8 percent to 3.4 percent with 2.8 percent the most likely outcome. Last month the central bank lowered its growth forecast from 3.2 percent, down from 2014's 4.8 percent.
It added that international oil prices have fallen significantly while prices of several other commodities imported by Colombia had stopped falling. If these trends were to persist, the fall in Colombia's national income would exceed expectations, which largely explains the strong depreciation of the peso against the U.S. dollar,
Colombia's Gross Domestic Product expanded by 0.8 percent in the first quarter of this year from the previous quarter for annual growth of 2.8 percent, down from 3.5 percent.
The Central Bank of Colombia issued the following statement:
The Board of Directors of Banco de la República in today’s meeting decided to maintain the benchmark interest rate at 4.5%. This decision took into account mainly the following aspects:
- In July, annual consumer inflation increased slightly, reaching 4.46%. The average of the four measures of core inflation rose for the tenth month in a row, registering at 4.29%. Analysts’ inflation expectations to one and two years and those embedded in public debt to 2, 3 and 5 years increased and continue in the upper half of the target range.
- The pass-through of nominal depreciation to consumer prices and the increase in the cost of imported raw materials, as well as the lower dynamics in food supply, explain in great part the acceleration of inflation so far this year.
- The pass-through of part of the devaluation of the peso to consumer prices and the persistence of El Niño can delay the convergence of inflation to the target, both by their direct impact on prices and inflation expectations and through the activation of indexing mechanisms.
- The figures of global economic activity continue reflecting a weak external demand, lower to the one recorded in 2014. In the United States and the euro zone, economy continues to recover, but at rates somewhat lower than anticipated. In China, economic activity continues slowing down, and the major economies in Latin America registered low growth or contractions of their output.
- The risk of a greater economic slowdown in China and the unexpected devaluation of the yuan generated volatility in global financial markets and in the prices of some commodities. The US dollar continues to strengthen and it is expected that the Federal Reserve of the United States will increase its interest rate during the remaining of this year.
- The international price of oil exhibited a significant decrease and the prices of several commodities imported by Colombia stopped falling. Should these levels in the prices of exports and imports continue, the terms of trade and the national income would fall more than expected. This largely explains the strong devaluation of the peso vis-à-vis the US dollar as compared with other countries’ currencies.
- In Colombia, for the second quarter, the indicators of retail trade, consumer and retail confidence, and economic expectations indicate that domestic demand continues to weaken. The industry contracted and construction indicators suggest a slowdown in the sector. Data for July show a fall in oil production, while that of coffee increased. Considering this, and given the developments observed in the external demand for domestic goods and services, the technical staff maintained the estimate of economic growth for all of 2015 within a range of 1.8% and 3.4%, with 2.8%, as the most likely outcome.
In all, inflation remains above the upper limit of the target range and domestic expenditure of the economy continues adjusting to the lower dynamics of national income. Projections indicate that in the monetary policy horizon, the temporary price shocks will be reversed and the probable excesses of capacity will contribute to inflation converging to the target in an environment of anchored inflation expectations. However, the partial pass-through of the devaluation of the peso to prices and an eventual intensification of El Niño could delay such convergence.
The Board will continue monitoring carefully the behavior and projections of economic activity and inflation in the country, as well as those of asset markets and the international situation. It also reiterates that the course of monetary policy will depend on the information available."