Friday, December 16, 2016

Colombia cuts by 25 bps, inflation determines next move

    Colombia's central bank cut its key policy rate by 25 basis points to 7.50 percent, the first rate cut since March 2013, and said "future policy decisions will depend on new data on the speed of convergence of inflation to the target and the intensity, nature and persistence of the economic slowdown, among other things."
    In August the Central Bank of Colombia paused after raising its rate by a total of 325 basis points since September, including 200 points this year. After today's rate cut, the rate has been raised by a net 175 points this year.
    In November two of the central bank's seven board members voted for a rate cut and today four members voted for the cut while the remaining three board members voted to maintain the rate.
    Among the factors cited behind the decision to cut rate, the central bank noted faster-than-expected fall in inflation, lower-than-expected economic growth due to lower investment, a slowdown in consumption, and slowing credit issuance, especially commercial credit.
    In the third quarter of this year Colombia's economy grew by 0.3 percent from the second quarter for annual growth of 1.2 percent, the lowest growth rate since the second quarter of 2009.
    Data for the third quarter and recent figures for the fourth quarter suggest Colombia's economy may expand by less than 2.0 percent, the bank said, again revising downward its forecast.
    In November the central bank estimated 2016 growth close to 2 percent, down from September's forecast of 2.3 percent.
    Colombia's inflation rate decelerated to 5.96 percent in November from 6.48 percent in October, continuing the steady decline from a 2016-high of 8.97 percent in July.
    While the fall in inflation is faster than the central bank expected, it added that core inflation indicators and inflation expectations one year ahead still exceed the bank's 3.0 percent target.

    The Central Bank of Colombia issued the following statement:

"The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 7.5%. For this decision, the Board mainly took into account the following aspects:
  • In November, annual consumer inflation and the average of core inflation indicators lowered, reaching 5.96% and 5.74%, respectively, completing four consecutive months in which the reduction of inflation exceeded the forecast of the technical staff at the Central Bank. Analysts’ inflation expectations to one and two years posted at 4.36% and 3.58%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years are between 3.8% and 4.4%. 
  • The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade quickly. This is suggested by the slowdown in the food CPI, and to a lesser extent, by the recent behavior of the prices that were mostly impacted in the past by the strong nominal depreciation. 
  • Global economic activity remains weak, and it is likely that it will register a slight recovery in 2017. In the US, gradual tightening of the monetary policy continued, the US dollar has strengthened, and the long-term international interest rates increased.  Colombia´s terms of trade continue recovering due to the increase in the prices of oil.  In this setting, the recent depreciation of the peso has been moderate.
  • In the third quarter, the Colombian economy expanded 1.2% yearly, a figure lower than expected by the technical staff at Banco de la República and by the market. Domestic demand fell 1.1% due to lower investment and the slowdown in consumption.  These results and the new figures of economic activity for the fourth quarter suggest that economic growth in 2016 could be slightly lower than 2.0%.   
  • The new figures confirm that the current account deficit continues to reduce.  The forecast of the technical staff suggests a current account deficit of 4.7% of GDP in 2016 (equivalent to US$ 13.2 billion). 
  • Considering the current level of core inflation indicators and inflation expectations, various calculations of the real policy interest rate are above its average since 2005.  Also, credit has strongly slowed-down, especially commercial credit. 

In all, the Colombian economy continues to adjust to the strong shocks recorded since 2014, and the current account deficit is narrowing gradually.  Inflation continues to decline faster than expected, although core inflation indicators and inflation expectations to a year still exceed the target. The effects of several of the transitory supply shocks that have affected inflation and inflation expectations continue to reverse, and this trend is expected to continue. 

Monetary policy decisions have ensured the process of convergence of inflation to its target and reaffirm the commitment of the Board to reach the 3.0% ± 1 pp target in 2017. In this environment, and facing a weaker-than-forecast output dynamics, the Board of Directors decided to reduce the degree of tightness of the monetary policy stance by reducing the benchmark interest rate by 25 bp. 

Future policy decisions will depend on new data on the speed of convergence of inflation to the target and the intensity, nature, and persistence of the economic slowdown, among other things.

The Board considers that, given the negative effects of the fall in oil prices on public finances, the structural tax reform bill presented by the Government to the Congress is a crucial action that contributes to long-term growth, to strengthen fiscal sustainability, to maintain macroeconomic stability, and to preserve the credit rating.

The Board will continue to monitor the adjustment of expenditures and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, the macroeconomic stability. It also reaffirms its commitment to maintain inflation and its expectations anchored to the target. 

The decision to reduce the benchmark interest rate was approved by four members of the Board. The three remaining members of the Board voted to keep it unaltered."