Honduras holds rate after 3 cuts, inflation to slowly rise

September 28, 2020

Honduras’ central bank left its monetary policy rate steady after cutting it three times this year, most recently in late July, confirming it still expects inflation to remain close to the lower limit of its tolerance range the rest of this year but then to gradually rise to the midpoint of its range in 2021 as the country’s economy recovers.

The Central Bank of Honduras (BCH) left its policy rate at 3.75 percent after cutting it three times this year by a total of 175 basis points following cuts in February, March and July.

Honduras’ inflation rate rose for the third consecutive month to 3.2 percent in August from a year-low of 2.29 percent in May, below the midpoint of the bank’s target range of 4.0 percent, plus/minus 1 percentage point.

In its statement from July 31, the bank’s open market operations commission, COMA, forecast inflation would be below the lower limit of its tolerance range this year.

In its most recent statement, which was released on Sept. 25 following COMA’s meeting on Sept. 21, the bank reiterated this forecast but added it expects inflation in 2021 to gradually return to the central value of its range as the economy recovers.

It noted the low inflation rate this year was due to supply shocks, lower international fuel prices, and demand shocks due to the contraction of consumption and domestic investment.

The economy of Honduras shrank by an annual 1.2 percent in the first quarter of this year and in July BCH raised its estimate of the contraction this year to between 7.0 and 8.0 percent from May’s forecast of a decline of only 2.9 to 3.9 percent.

As of July, the country’s output of goods and services was down a cumulative 10.2 percent and an annual 12.3 percent, the bank said, adding manufacturing, commerce, private construction and tax collection contributed most to the fall.

But the country’s external position had strengthened, with net international reserves of US$7.463 billion as of Sept. 17, mainly due to higher external financing to mitigate the impact of COVID-19, BCH said.

In June the International Monetary Fund released some US$233 million to help Honduras meet balance of payments and financing needs after the country in late March drew downUS$143 million.

After declining from late-March through mid-May, Honduras’ lempira has bounced back to trade at 24.6 to the U.S. dollar, unchanged this year.

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