The Central Bank of Colombia raised its rate by another 25 basis points to 7.75 percent and has now raised its by 325 basis points since embarking on a tightening cycle in September 2015. This year it has raised the rate by a total of 200 points by raising it every single month of the year.
Noting that both consumer price and core inflation rose in June, the central bank said this was due to the past depreciation of the peso, which was partly transmitted to consumer prices, the lagged effect of the El Nino weather on the harvest and thus food prices, inflation expectations in excess of the target and by the activation of some inflation indexation.
A trucking strike will affect July prices, but this impact should quickly fade, the bank said.
The rise in inflation comes at the same time that Colombia's economy is adjusting "in an orderly" manner to the strong shocks since 2014, such as the fall in crude oil prices, with the result that the current account deficit is gradually improving.
Colombia's headline inflation rate rose to a new 2016-high of 8.6 percent in June and the highest rate seen since December 2000. Core inflation rose to 6.82 percent, with inflation expectations one to two years ahead at 4.6 percent and 3.7 percent, respectively.
Colombia's economy grew by an annual rate of 2.5 percent in the first quarter and data show that growth in the second quarter will be similar, the bank said.
The central bank's staff, however, lowered its 2016 growth forecast to 2.3 percent from 2.5 percent, within a range of 1.5-3.0 percent.
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 7.75%. For this decision, the Board mainly took into account the following aspects:
- In June, annual consumer inflation and the average of core inflation indicators increased, reaching 8.6% and 6.5%, respectively. Analysts’ inflation expectations to one and two years posted at 4.6% and 3.7%, respectively, and those embedded in public debt bonds (2, 3, and 5 years) remained relatively stable within a range of 4.0% and 4.5%.
- The strong increase in food prices as well as nominal depreciation and its partial pass-through to consumer prices mainly continue explaining the difference of inflation and the inflation target. Although El Niño ended and the exchange rate has not exhibited any strong upward trend for a number of months now, the intensity of these shocks produced a deviation of inflation and its expectations from the target, and triggered some indexation mechanisms. The effects of the trucking strike on consumer prices will be felt in July, but it is expected that they fade quickly.
- Global economic activity remains weak, and it is forecast that the average growth of Colombia’s trading partners in 2016 will be lower than the one observed in 2015. In the United States, the Fed maintained its benchmark interest rate unaltered, and it is likely that strengthening of the monetary policy in that country will be more gradual. The price of oil has fallen, but it remains at levels above those recorded at the beginning of the year. With this, it is likely that deterioration in the dynamics of national income be lower than the estimated a quarter ago.
- The most recent figures of economic activity suggest that output growth in the second quarter of 2016 would be similar to that recorded in the first quarter. For 2016, the technical staff revised its forecast of the most likely figure of growth from 2.5% to 2.3%, within a range between 1.5% and 3.0%. These forecasts imply a domestic demand that continues to adjust, partly as a response to the deterioration in the dynamics of national income.
- The new figures for foreign trade indicate that the external deficit continued to fall in the second quarter. For all 2016, the technical staff forecasts a further reduction of the current account deficit. In this new forecast, the deficit would be US $15 billion, which would be equivalent to 5.3% of GDP. This behavior reduces the country's vulnerability to adverse external shocks.
In all, inflation rose due to the past depreciation of the peso, the lagged effect of El Niño (which is already over), inflation expectations exceeding the target, and by the activation of some indexation mechanisms. Similarly, the Colombian economy continues to adjust in an orderly manner to the strong shocks recorded since 2014, and the current account deficit is correcting gradually.
In this context, the response of the monetary policy must acknowledge that the shocks that have affected prices are transitory, and seeks to anchor inflation expectations in order to convergence of inflation to the 3.0% target (±1 pp) 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 of Directors reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation. Similarly, the Board will continue to follow up on the effects of the adjustment of expenditure on inflation."
Friday, 29 July 2016
The Board of the Bank of the Republic in its meeting today decided to increase the interest rate at 25bp intervention and stood at 7.75%. In this decision, the Board took into consideration mainly the following aspects:
- In June annual consumer inflation and average core inflation measures increased and stood at 8.6% and 6.5%, respectively. Inflation expectations of analysts to one and two years stood at 4.6% and 3.7%, and those arising from public debt papers 2, 3 and 5 years remained relatively stable and are among 4.0% and 4.5%.
- The sharp increase in food prices and the nominal depreciation and partial transmission consumer prices remain largely explaining the difference between inflation and the target. Although the phenomenon of El Niño ended and the exchange rate for months no strong upward trend, the intensity of these shocks was a deviation of inflation and expectations of the target, and triggered some indexation mechanisms. Trucker unemployment effects on consumer prices will be felt in July, but is expected to quickly fade.
- Global economic activity remains weak and is projected to average growth of trading partners in 2016 is low and lower than in 2015. The Federal Reserve of the United States unchanged its benchmark interest rate and is likely to tightening of monetary policy in that country occurs slowly. The price of oil has dropped, but still above the lows recorded at the beginning of the year levels. With this, it is likely that the deterioration in the dynamics of national income is less than the estimated one quarter ago.
- The new figures of economic activity suggest that output growth in the second quarter will be similar to that recorded in the first. For all of 2016, the technical team most likely reduced the growth forecast from 2.5% to 2.3%, within a range between 1.5% and 3%. These forecasts have implied that domestic demand continues to adjust, partly in response to the deterioration in the dynamics of national income.
- The new foreign trade figures indicate that the external deficit continued to decline in the second quarter. For all of 2016, the technical team projects a further deficit reduction in the current account. In this new forecast the deficit would be US $ 15 billion equivalent to 5.3% of GDP. This behavior reduces the vulnerability that the country has to face adverse external shocks.
In short, inflation increased on account of the past depreciation of the peso, for the stragglers of El Niño already completed, by inflation expectations exceeding the goal and activation of some indexation mechanisms effects.Likewise, the Colombian economy continues to adjust in an orderly fashion to strong shocks recorded since 2014 and the deficit in the current account is gradually being corrected.
In this environment, monetary policy response acknowledges that shocks that have affected the prices are transitory, and looking to anchor inflation expectations in order to ensure convergence of inflation to the target of 3% ± 1 percentage point in 2017. to that end, the Board considered desirable an increase in benchmark interest rate by 25 basis points. The tightening of monetary policy will continue to contribute to the correction of the external deficit.
The Board reaffirms its commitment to keep inflation and expectations anchored to the target, recognizing that there is an increase in inflation transitory nature. Also, it will continue to monitor the effects of the adjustment of spending on inflation.