Friday, April 28, 2017

Colombia cuts rate 50 bps and lowers growth forecast

    Colombia's central bank cut its benchmark intervention rate by a further 50 basis points to 6.50 percent, a larger cut than expected by most analysts, and said further cuts would depend on how fast inflation falls to its 3.0 percent target and "excessive" economic slowdown.
     It is the third rate cut this year by the Central Bank of Colombia, which has lowered the rate by a total of 100 basis points as inflation continues to decelerate amid a sluggish economy.
    "In Colombia, recent indicators of economic activity, such as retail sales, industrial production and consumer confidence suggest a larger-than-expected weakening of the economy in the first quarter of of this year," the central bank said.
      The bank's staff lowered its 2017 growth forecast to 1.8 percent from 2.0 percent, within a range of 0.8 to 2.6 percent.
     In the last central bank survey, analysts lowered their 2017 growth forecasts to 2.02 percent from 2.3 percent, below the government's target of 2.5 percent. Forecasts for 2018 were cut to 2.8 percent from 3.0 percent.
      Colombia's Gross Domestic Product grew by an annual rate of 1.6 percent in the fourth quarter of last year, up from 1.2 percent in the third quarter.
     The bank's board, this time with only six instead of seven members, was split, with four members approving the 50 basis point cut while two wanted to cut the rate by 25 points.
     Among the reasons for the rate cut, the central bank pointed to growing economic weakness and the risk of excessive deceleration from excess capacity in the economy along with uncertainty about how fast inflation will decelerate to the target of 3.0 percent, within a range of plus/minus 1 point.
    "The current level of the real policy interest is contractive," the central bank said, adding that inflation expectations were also declining.
     Colombia's inflation rate eased to 4.69 percent in March from 5.18 percent in February - the eight consecutive monthly decline - while inflation expectations for December 2017 and 2018 dropped to 4.4 percent and 3.5 percent, respectively.
     Colombia's peso was trading at 2,941 to the U.S dollar today, up 2 percent this year.

    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 50 bp to 6.5%. For this decision, the Board mainly took into account the following aspects:
  • In March, annual inflation lowered to 4.69%. The average of core inflation indicators remained stable at 5.55%. Analysts’ inflation expectations to December 2017 and 2018 lowered, and posted at 4.4% and 3.5%, respectively. Those derived from the monthly surveys also lowered, but registered above 4.0% to one and two years. Those embedded in public debt bonds also reduced, and are close to 3.0% to the end of 2018. 
  • The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade. For example, this is suggested by the slowdown of the food CPI in March.  
  • Annual variation of the CPI excluding food and regulated items increased, possibly due to the temporary effect of the increase of indirect taxes and to the increasing indexation, which has reflected mainly on a larger annual variation of non-tradable prices of goods and services.    
  • Growth of external demand is expected to be somewhat greater than the one registered in 2016. However, so far this year, uncertainty about the behavior of this variable has increased, as well as of the prices of commodities and capital flows. 
  • In Colombia, recent indicators of economic activity such as retail sales, industrial production, and consumer confidence suggest that the economy weakened in the first quarter of the year, more than had been expected. With all this, the technical staff reduced its economic growth forecast for 2017 from 2.0% to 1.8%, within a range between 0.8% and 2.6%. 
  • 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.

Based on this information, the Board considered the following aspects:

  • The increasing weakness of the economic activity, and the risk of an excessive slowdown. Recent indicators suggest a greater risk of increases in the excess capacity of the economy, although uncertainty regarding their size is strong.   
  • Uncertainty regarding the pace of convergence of inflation to its 3.0% target. The reduction of inflation was in line with the expectations of the technical staff, but their reduction was explained largely by the behavior of food prices. The indexation mechanisms and the increase in the persistence of inflation were reflected in the increase of the annual variation of non-tradable prices, and could delay convergence of inflation to its 3.0% target. Contrary to this, a greater slowdown reduces inflation forecasts in the policy horizon. 
  • The current level of the real policy interest rate is contractionary. With the reduction of inflation expectations, the current level of the benchmark interest rate would be even more contractionary.

In this context, the Board of Directors considered that a 50 bp reduction is in line with the risk balance and is consistent with the objective of reaching a 3.0% inflation target in 2018. Additional reductions will depend on the balance of risks, between a slow convergence of inflation to 3.0% and an excessive slowdown on the economy.
The decision to reduce the benchmark interest rate by 50 bp was approved by four members of the Board. The remaining two Board Members voted for a 25 bp reduction."



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