Monday, August 31, 2020

Colombia cuts rate 6th time to boost economy further

     Colombia's central bank cut its benchmark interest rate for the sixth consecutive month and reiterated its message from July that the balance of risks "suggests that it is appropriate to provide an additional boost to the economy," and the impact of monetary policy will be greater as the different economic sectors are gradually opened as the pandemic allows.
     The Central Bank of Colombia (CBC) cut its benchmark interest rate by another 25 basis points to 2.0 percent and has now cut it 225 points this year following cuts in March, April, May, June and July.
      CBC's board said the decision was unanimous and took into account inflation, weak aggregate demand and spare capacity as confirmed by data for the second quarter, a deterioration of the labour market and labor income along with an improvement in financial market conditions.
     Colombia's inflation rate decelerated to a new 2020 low of 1.97 percent in July from 2.19 percent in June while inflation expectations for end-2021 at 2.87 percent and two-year expectations derived from public debt securities of 1.56 percent.
     CBC has forecast inflation this year between 1.0 and 2.0 percent, with 1.5 percent the most likely, well below its long-term target range of 3.0 percent.
     Colombia's gross domestic product contracted 15.7 percent year-on-year in the second quarter of this year after expanding 1.4 percent in the first quarter while the unemployment rate rose to 20.2 percent in July from 19.8 percent in June and compared with 10.7 percent in July 2019.
     Earlier this month CBC estimated Colombia's economy would shrink between 6.0 and 10.0 percent this year, with a 8.5 percent contraction the most likely.
     In its quarterly monetary policy report the central bank forecast growth in 2021 of between 3.0 and 8.0 percent, with 4.1 percent the most likely outcome. Inflation is expected to remain below 3.0 percent.
     Colombia's government has forecast 5.5 percent contraction this year and growth of 6.6 percent next year.
     Like most other currencies, Colombia's peso fell against the U.S. dollar in March, then rebounded through May. From mid-July to the the middle of last week it then fell again but has firmed in the wake of the U.S. Federal Reserve's more lenient approach to its inflation target and rose further today.
     The peso was trading at 3,741.3 to the dollar today, down 12.2 percent this year.

     The Central Bank of Colombia issued the following press release:

"The Board of Directors of the Central Bank of Colombia (BDBR) unanimously reduced the benchmark interest rate by a quarter percentage point to 2.0%. For this decision, the Board mainly took into account the following elements:

  • Inflation in July stood at 1.97%, and the average of core inflation indicators at 1.76%. Inflation expectations for the end of 2021 from surveys stand at 2.87%, while two-year expectations from public debt instruments are at 1.56%.
  • The growth figure for the second quarter confirms a weak aggregate demand and spare capacity.
  • The data for June reiterate the deterioration of the labor market and the reduction of labor income.
  • Financial market conditions have improved vis-à-vis the onset of the crisis, and the high liquidity of international and domestic markets has resulted in lower sovereign risk premia and adequate access to external financing. Additionally, the current account deficit has adjusted and is expected to continue doing so throughout the year, reflecting lower external financing needs.  

Under these conditions, the monetary policy risk balance suggests that it is appropriate to provide an additional boost to the economy. The impact of monetary policy will be greater inasmuch as the conditions of the pandemic allow to continue reopening the different economic sectors gradually. "


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