Colombia pauses in rate hike cycle, sees falling inflation

By CentralBankNews.info
    Colombia’s central bank left its policy rate steady at 7.75 percent, pausing after 11 consecutive rate hikes, saying the effects of temporary supply shocks on inflation and inflation expectations were expected to go into reverse in coming months which, together with the monetary policy actions taken, should help push inflation down to the target range next year.
     The Central Bank of Colombia has raised its rate by a total of 325 basis points since embarking on a tightening cycle in September 2015, including 200 points this year.
    At today’s board meeting six members voted to keep the rate steady after assessing the risk balance for inflation and growth, but one board member voted for another 25-point hike.
    “New data on the behavior of prices and aggregate demand will provide more information about the speed of the expected convergence of inflation to the target, and the intensity, nature and persistence of the economic slowdown,” the central bank said.
    Colombia’s consumer price inflation rate rose to 8.97 percent  in July from 8.6 percent in June while inflation expectations one to two years ahead stable at 4.6 percent and 3.7 percent.
    The central bank, which targets inflation of 3.0 percent, plus/minus 1 percentage point, said the lagged effects of the El Nino weather phenomenon, the high depreciation of the peso in the past and its partial pass-through to consumer prices and the associated activation of price index mechanisms, largely explained the difference between the inflation rate and the bank’s target.
   “In the following months, normalization of weather conditions and agricultural supply must generate drops in the prices of foods, especially of perishable items,” the bank said.
    The exchange rate of Colombia’s peso began depreciating with the fall in crude oil prices in mid-2014 and continued to fall through 2015 until Feb. 11, 2016 when it hit a record low of around 3,437 to the U.S. dollar, down almost 50 percent since levels seen in July 2014. This pushed up import prices and thus inflation.
    But since then, the peso has been slowly appreciating and today it was trading at 2,962.6 to the U.S. dollar, up 7.2 percent since the start of this year.
    A rise in crude oil prices this year has helped Colombia’s terms of trade to improve, but they remain below the 2015 average and 2.0 percent annual economic growth in the second quarter – down from 2.5 percent in the first quarter – was less than the 2.6 percent rate that was expected by the central bank’s staff.
    Data from the third quarter suggest a downward bias to the growth forecast for this year, said the central bank, which in July lowered its 2016 growth forecast to 2.3 percent from 2.5 percent.

    The Central Bank of Colombia issued the following statement:
   
 
“The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%. For this decision, the Board mainly took into account the following aspects:

• In July, annual consumer inflation and the average of core inflation indicators increased, reaching 8.97% and 6.61%, respectively. Analysts’ inflation expectations to one and two years remained stable, posting at 4.6% and 3.7%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years lowered within a range of 3.8% and 4.4%.
• The lagged effects of El Niño, the high depreciation in the past and its partial pass-through to consumer prices, and the activation of some indexation mechanisms explain to a large extent the difference between inflation and its target. In the following months, normalization of weather conditions and agricultural supply must generate drops in the prices of food, especially of perishable items.
• Global economic activity remains weak and it is likely that the average growth of Colombia’s trading partners for 2016 be low and less than estimated a month ago. As for the United States, a slow tightening of monetary policy is still projected. The price of oil remains above the levels recorded at the beginning of the year, and the prices of some international commodities imported by Colombia have fallen.  With this, the terms of trade have increased, but remain at low levels, lower than the average observed in 2015.
• In the second quarter of 2016, the Colombian economy grew 2.0% annually, a figure lower than the central forecast by the technical staff at the Central Bank (2.6%). The most dynamic sectors were industry and financial services, while mining, agriculture and electricity, gas and water utilities reported declines in their production. These figures, together with the new records of economic activity for the third quarter, suggest a downward bias to the growth projection for 2016.
• Foreign trade figures for the second quarter suggest that the external deficit narrowed. The technical staff continues forecasting a current account deficit of US 15 billion in 2016, equivalent to 5.3% of GDP, lower than initially forecast.