Tuesday, November 24, 2020

Honduras cuts rate 4th time, hurricanes to hit growth

     Honduras' central bank lowered its monetary policy rate for the fourth time this year, saying additional monetary measures were necessary to ease the effects of the COVID-19 pandemic on economic activity and employment, which will also take a hit from recent hurricanes.
     The Central Bank of Honduras (BCH) cut its policy rate by another 75 basis points to 3.0 percent and has now cut it by a total of 250 points this year following earlier cuts in February, March and July.
     BCH also cut its rate by 25 basis points in December 2019 so the rate has now been lowered by 275 points since then.
      BCH will also cut the interest rate on its permanent credit facilities to 3.50 percent from 4.25 percent and the rate on repo operations to 4.0 percent from 4.75 percent.
     As part of a coordinated economic policy response since the beginning of this year, BCH said it had conducted its monetary policy with the aim of generating an important boost to credit and despite the significant drop in domestic demand, the central bank said credit to the private sector had risen in recent months by around 5.0 percent.
     The latest rate cut, which was announced in a statement on Nov. 23, should help make financial conditions more flexible and help lower the cost of financing, boost investment and consumption, and aid in replacement of the country's infrastructure, BCH said.
     Inflation in Honduras rose for the fourth month in a row to 3.4 percent in October from a low of 2.29 percent in May but remains below the midpoint of the bank's tolerance range due to lower international fuel prices and demand.
      The hit to Honduras and other Central American countries from hurricanes Eta and Iota earlier this month could lead to a higher rise in food prices, but the central bank said this was only a temporary impact and it is forecasting that inflation will rise to the center of its range of 4.0 percent, plus/minus 1 percentage points, for the rest of this year and in 2021.
      Separately, Reuters reported that Wilfredo Cerrato, president of the central bank, said the devastation caused by Hurricane Eta would shave an additional percentage point from economic growth, leading to a contraction of 8-9.0 percent in 2020.
      In its statement, BCH said the combination of supply and demand shocks from the pandemic along with the impact of the hurricanes could lead to a larger drop in economic activity than expected.
     As of September, the bank's monthly index of economic activity showed a cumulative contraction of 9.5 percent and in July the central bank raised its forecast for an economic contraction of 7.0-8.0 percent this year.
     In the second quarter of this year, Honduras' gross domestic product shrank by 17.6 percent from the first quarter, when GDP shrank by a quarterly 2.2 percent.



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