Friday, September 25, 2020

Colombia cuts rate 7th time in 2020 by narrow majority

      Colombia's central bank lowered its key interest rates for the seventh consecutive month but its board only approved the cut by 4 votes to 3, signaling it is getting close to wrapping up its 3-1/2 year monetary easing cycle.
     The Central Bank of Colombia (BDBR) cut its interest rate by another 25 basis points to 1.75 percent and has now cut it by 250 basis points since the start of this year.
      The three board members that voted against the rate cut voted to maintain the rate while the board of directors was unanimous in its August decision to cut the rate.
      Since December 2016, when the central bank began cutting its rate from 7.75 percent after inflation decelerated from just under 9 percent in July that year, BDBR has cut its rate 18 times by a total of 6 percentage points.
      The close decision mirrors that of analysts that were also split in their expectations to today's decision given the extent of the rate cuts in the current easing cycle, which could ignite inflation expectations.
      In a statement also issued today, the International Monetary Fund's executive board approved Colombia's request to boost its flexible credit line to $17.3 billion, with the 2-year arrangement in effect until April 30, 2022.
     "This higher access, or augmentation, aims to strengthen the country's international liquidity position in the context of the COVID-19 pandemic," the IMF said, adding Colombia intends to draw up to around US$5.3 billion from the facility as part of its financing plan for the fiscal 2020 budget.
      Colombia's inflation rate fell to 1.88 percent in August from 1.97 percent in July, with the central bank saying inflation expectations for the end of 2021 were 2.75 percent and 2-year expectations at 2.05 percent based on the yield of public debt.
      Colombia's economy contracted by 14.9 percent in the second quarter from the first quarter, when gross domestic product shrank a quarterly 2.4 percent, and the central bank confirmed it still expects the economy to shrink between 6.0 and 10.0 percent this year.
     But in response to a relaxation of measures to contain the COVID-19 pandemic, the central bank said economic activity was shrinking at a slower rate, though still shrinking, and there was still a marked deterioration in the labour market and disposable household income.
     Colombia's unemployment rate rose to 20.2 percent in July from 19.8 percent.
     Colombia's peso has been declining steadily since May 2018 though it has bounced back after plunging 13 percent during March. Today the peso was trading at 3,886 to the U.S. dollar, down 15.5 percent this year.

     The Central Bank of Colombia issued the following statement:

"The Board of Directors of the Banco de la República, with a vote of 4 to 3, reduced its interest rate by a quarter of a percentage point, taking it to 1.75%

This decision took into consideration the following elements:

  • Inflation in August was 1.88% and inflation excluding food and regulated items at 1.57%. The inflation expectations from the surveys at the end of 2021 stand at 2.75%, while the two-year expectations obtained from debt papers stand at 2.05%.
  • In response to the relaxation of the isolation measures, a slower rate of deterioration in economic activity is observed, although economic activity continues to contract. Along these lines, the technical team of Banco de la República estimates that the economy will contract between 6% and 10% in 2020.
  • Although the July data reflect a slight improvement in the national unemployment rate (19.8%), they show a marked deterioration in the labor market and in household disposable income.
  • Most of the interest rates in the financial system have included significantly the reduction in the monetary policy rate, in a context in which there are increases in the volumes of commercial and consumer credit.
  • External financial conditions continue to be favorable and the dynamics of the current account reflects lower external financing needs.

Under these conditions, the balance of risks of the monetary policy suggests the convenience of reducing the interest rate.

The decision to reduce the interest rate by a quarter of a percentage point was approved by 4 members of the Board. The remaining members voted to leave the rate unchanged."


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