BOGOTA: Colombia’s central bank held its benchmark interest rate unchanged on Friday for a fourth month to quell inflation even after third-quarter economic growth proved slower than expected. The bank kept the rate at 7.75 percent but two of its seven-member board voted for a cut, while five voted to hold, according to its decision statement.
The split showed some policymakers were beginning to discuss the possibility of Colombia’s first rate cut in over three years after the economy grew 1.2 percent annually in the third quarter, less than the 1.5 percent expected by the market. Economic growth has slowed amid a slump in the price of crude oil, one of Colombia’s leading exports.
Following the rate announcement, Finance Minister Mauricio Cardenas revised down this year’s economic growth forecast to 2 percent from 2.5 percent previously and next year he saw 3 percent expansion, down from his previous forecast of 3.5 percent. “The economy continues to adjust to the strong shocks registered since 2014 and the current account deficit is declining gradually,” the statement said. “The rhythm of output has been weaker than expected and inflation continues to ease, although basic inflation and inflation expectations over a year are still above target.”
The slowdown in consumer price rises is fueling the idea the bank could cut rates as soon as January, in what would be the first reduction since March 2013. Inflation hit nearly 9 percent in July and will probably continue to recede now that a prolonged drought has eased and a truckers strike has ended, the bank has said. Inflation reached 6.48 percent for the 12 months ended in October, but it was still well above the bank’s long-term target range of 2 percent to 4 percent.
Food prices, which make up about 30 percent of the inflation index, should continue to fall until at least the first quarter of next year, though some policymakers said it was unlikely that inflation would drop to the target level in 2017. Some economists question how a tax reform being tackled in Congress could impact the bank’s future decisions.
“We haven’t measured the impact an increase in VAT may have on inflation expectations,” said Juan David Ballen, an economist at Casa de Bolsa, referring to a proposed increase in value-added tax to 19 percent from 16 percent.”Failure to approve it will compromise the credit rating which will cause inflationary pressure as the peso devalues,” the bank said.
