Wednesday, June 22, 2016

Colombia raises rate 10th month in a row to curb inflation

    Colombia's central bank raised its policy rate for the 10 consecutive month and reiterated its statement from May that it must ensure that the recent shocks to inflation remain temporary and inflation converges towards its target in 2017.
    The Central Bank of Colombia raised its policy rate by another 25 basis points to 7.50 percent, as expected, and has now raised it by 300 points since embarking on a tightening cycle in September 2015. This year it has raised its key rate by 175 points.
    "Increases in food prices and the pass-through of nominal depreciation to consumer prices continue to exert inflationary pressures," the central bank said, showing little inclination to pause in its tightening campaign.
    Colombia's headline inflation rate rose to 8.2 percent in May from 7.93 percent in April, with the central bank again noting that the impact of the El Nino weather pattern on food prices and the magnitude of the depreciation of the peso had moved inflation and inflation expectations away from its target and also triggered indexation mechanisms.
    But core inflation eased to 6.55 percent in May from 6.69 percent and expectations embedded in public debt bonds for 2, 3 and 5 years eased to 4.0 percent and 4.5 percent from 4.3 percent and 4.7 percent in May.
   The central bank targets inflation of 3.0 percent, plus/minus 1 percentage point, and Colombia's government earlier this month raised its inflation forecast for this year to 6.5 percent.
    Colombia's economy has been slowed by low oil and commodity prices with annual growth the first quarter of 2.5 percent down from 3.4 percent in the previous quarter as domestic demand slowed less than expected.
    The central bank said its staff had retained its growth forecast of between 1.5 and 3.2 percent, with 2.5 percent as the most likely figure.

    The Central Bank of Colombia issued the following statement:

"The Board of Directors of Banco de la República at today’s meeting decided to increase the benchmark interest rate by 25 bp to 7.50%. For this decision, the Board mainly took into account the following aspects:

  • Annual consumer inflation increased in May, reaching 8.2%. In contrast, the average of core inflation indicators lowered to 6.3%. Analysts’ inflation expectations to one and two years posted at 4.4% and 3.7%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years lowered within a range of 4.0% and 4.5%.
  • Increases in food prices and the pass-through of nominal depreciation to consumer prices continue to exert inflationary pressures. Although these are temporary shocks, the intensity of El Niño and the magnitude of the depreciation of the peso have diverted inflation and inflation expectations from the target, and have activated some indexation mechanisms.
  • The figures for global economic activity suggest a lower-than-expected dynamics of global output. It is likely that the average growth of Colombia’s trading partners in 2016 be lower than the one observed in 2015.
  • The expected pace of adjustment of monetary policy in the United States, international interest rates and country risk premia are lower today than at the beginning of the year. Oil prices remain at higher levels than forecast for the current year. Consequently, the country’s terms of trade and national income could fall less than what was anticipated at the beginning of the year. 
  • Economic growth in the first quarter of 2016 (2.5%) was in line with the forecast by the technical staff from the Central Bank. Domestic demand slowed down less than expected, mainly due to a higher-than-expected dynamic of private consumption. Exports increased more, and imports fell less than forecast. With this information and new data of economic activity for the second quarter, the technical staff kept the growth forecast for 2016 between 1.5% and 3.2%, with 2.5% as the most likely figure.
  • During the first quarter of 2016, the current account deficit was US$ 3,381 million (5.6% of GDP), a figure lower than forecast and than the quarterly values recorded since the beginning of 2014. This lower current account deficit reduces the country's vulnerability to adverse external shocks.  

In summary, the Colombian economy continues adjusting in an orderly manner to the strong shocks recorded since 2014. The current account deficit is correcting gradually, and the risk of an excessive deceleration of domestic demand remains moderate. Inflation has accelerated because of the depreciation of the peso, El Niño, and by the activation of some indexation mechanisms.
In this context, the response of the monetary policy must acknowledge that the shocks that have influenced prices are transitory, while being oriented to ensure the convergence of inflation to the 3.0% target (±1 percentage point) in 2017. With this purpose, the Board deemed appropriate to increase the benchmark reference rate by 25 basis points. The adjustment of the monetary policy will continue contributing to the correction of the external deficit.
The Board will continue to monitor the expected adjustment of expenditure and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, macroeconomic stability. Similarly, it reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation."


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