World Economy

Colombia CB Cuts Key Rate

Colombia’s central bankColombia’s central bank

Colombia’s central bank unexpectedly cut the benchmark interest rate on Friday as policymakers decided that consumer confidence and the sluggish economy need help even though inflation expectations remain high.

The board, which this month voted with six members instead of the usual seven, reduced borrowing costs a quarter point to 7.25% in a 4-2 vote as board members tussled over whether inflation or slow growth is the greater risk, Yahoo Finance reported.

The result was a market surprise because 15 analysts in a Reuters poll earlier this week expected a hold as inflation expectations are still too high after a rebound late last year, risking the bank’s 2% to 4% target range. The remaining five had forecast the cut.

“Today’s decision was due to the issue of consumer confidence. It’s an issue that needs attention,” said Finance Minister Mauricio Cardenas, who represents the government on the board and had called for a rate cut.

Bank Chief Juan Jose Echavarria agreed. “It’s the variable that held most weight in the decision we took today. It’s as though consumers are demonstrating their concern for the future,” he said.

Still, the bank may need to take further action if inflation expectations continue to rise, especially given that the government revealed slightly better-than-expected gross domestic product figures for the fourth quarter and full-year 2016.

The economy grew 1.6% in the fourth quarter versus a year ago, more than the 1.5% forecast by the market. In 2016, growth reached 2%, down from 3.1% in 2015 but more than the 1.8% expected by analysts.

“What we’ll see in the coming months is that the board will sometimes hold the rate and sometimes lower it. What we have said is that bit by bit rates will come down, the speed will depend on news,” said Echavarria. Inflation is coming down.”

Inflation came down to 5.47% in January, still well above the target range but well below the almost 9% it reached in July.

Latin America’s fourth-largest economy has been hit by a slump in global oil prices and is struggling with a rise in inflation. Crude oil is Colombia’s biggest export and leading source of foreign currency.

The government also launched a plan to help growth. 

The board voted with just six members because newly named Gerardo Hernandez was not sworn-in in time. He replaced Carlos Gustavo Cano, who told Reuters he had voted last month to maintain the rate.

Add new comment

Read our comment policy before posting your viewpoints