Colombia surprises again with rate cut on weaker growth

By CentralBankNews.info
     Colombia’s central bank surprised economist for the second month in a row by cutting its benchmark interest rate for the ninth time this year and said further rate cuts would depend on the speed with which inflation converges to the target, excess production capacity and the behavior of external factors.
      The Central Bank of Colombia (CBC) cut its key rate by another 25 basis points to 4.75 percent and has now cut it by 275 points this year and by 300 points since embarking on an easing cycle in December 2016.
       In contrast its statement in October, the bank’s board did not say that today’s easing should not be viewed a part of a continues series of cuts. This guidance that led many analysts to believe the CBC would keep its rate steady today and postpone any easing until early next year.
        Instead, the board said the rate cut was in response to better inflation projections for 2018 and greater economic weakness but international risks limit how much the bank’s monetary policy can act in a countercyclical manner.
      As in October, five board members voted to cut the rate by two members wanted to keep the rate.
      The rate cut comes after third quarter economic growth disappointed both the central bank and the government, which lowered its forecast for 2017 Gross Domestic Product to 1.8 percent.
       Finance Minister Mauricio Cardenas, the government’s representative on the board, last week said the central bank should cut its rate to boost growth after data showed 2.0 percent annual growth in the third quarter, up from 1.2 percent in the second and 1.3 percent in the first quarter.
       Central bank staff had expected 2.3 percent growth in the third quarter but domestic demand was weaker than expected and recent indicators point towards greater excess capacity.
       Data also confirmed that economic growth remains below potential though external demand is continuing to recover and exports contributed to growth as oil prices rose.
       In October the central bank forecast 1.6 percent economic growth for this year and raised its 2018 forecast to 2.7 percent from 2.4 percent.
       Although the country’s current account deficit is continuing to improve, the CBC pointed to international risks that may affect this as the U.S. Federal Reserve is likely to raise its policy rate next month and the exchange rate of the peso has already been volatile and declined in the last month.
       After slumping in 2014 and 2015, Colombia’s peso has been more stable since May 2016 and was trading around 2,980 to the dollar today, up 0.7 percent this year.
        Inflation in Colombia rose to 4.05 percent in October from 3.97 percent in September and inflation expectations for December eased to 3.95 percent and for December 2018 to 3.49 percent, the CBC said, adding that inflation was better than expected and below bank staff projections.
       The CBC has forecast 2017 inflation of close to 3.9 percent and 3 percent by end-2018.
        The central bank targets inflation at 3.0 percent, plus/minus 1 percentage point.

      The Central Bank of Colombia issued the following statement:

• In October, inflation increased, reaching 4.05%. The acceleration of inflation was mainly explained by the behavior of the food CPI. The average of core inflation indicators continued descending, standing at 4.5%.
• The observed inflation continued to be inferior to the expected by the market and by the Central Bank´s technical staff, mainly because of the good behavior of the groups of food, and tradable goods excluding food and regulated items. Inflation expectations recorded slight changes. Those by analysts to December 2017 and 2018 decreased and stand, on average, at 3.95% and 3.49%, respectively. Those embedded in public debt bonds remain above 3.0%.
• The direct effects of the strong transitory supply shocks that deviated yearly inflation from its target have faded. The effects of the indexation of prices and of the increases in indirect taxes at the beginning of the year are expected to reduce, and with this, that inflation and core inflation measures converge to the target.
• In Colombia, the output growth of the third quarter (2.0%) was lower than the forecast by the technical staff of the Central Bank (2.3%). The dynamics of the domestic demand was weaker than expected. The behavior of exports contributed to the growth. These figures confirm the persistence of economic growth below its potential; for this reason, the underuse of the installed capacity of the economy is expected to continue expanding.
• External demand continues recovering, driven mainly by developed economies. Oil prices increased, and the terms of trade are expected to end the year above the average level recorded in 2016. In the United States, the Federal Reserve is likely to increase its policy rate during the rest of the year. The exchange rate has been volatile and, on average, the peso has depreciated vis-à-vis the US dollar in the last month.

• The lower level of inflation versus the forecast from the last months and the lower projections of the technical staff in the policy horizon. This behavior has been registered in several of the sub-groups of the CPI, especially food and tradable goods excluding food and regulated items. These results suggest that convergence of inflation to its 3.0% target could be faster, although uncertainty in this regard remains high.

• A weaker-than-expected economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the income dynamics due to the fall in oil prices. Recent indicators point to larger excesses of capacity of the economy, although the uncertainty in terms of their size is high.
• Although the orderly adjustment of the current account deficit is expected to continue, there are risks in the international environment that may affect such adjustment.

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