The Central Bank of Colombia Lowers its Intervention Interest Rate by 50 Basis Points
At a meeting today, the Board of Directors of the Central Bank of Colombia cut the Bank’s intervention interest rate by 50 basis points. This reduction places the repo auction rate at 4.5%.
Annual consumer inflation in May was 4.77%, having fallen for the seventh month in a row. Once again, the decline was in food prices, as well as non-tradables and regulated prices. The core inflation indicators continued to fall and medium and long term expectations of inflation were in the upper half of the long-term target range set by the Board (3%+/- one percentage point).
The way prices are performing confirms that less inflationary pressure is a reflection of the weakness in internal and external demand, lower inflation expectations and the drop in commodity prices compared to the high point in 2008. The Board expects annual inflation to decline appreciably in June and to end the year below the midpoint of the target range (5%).
The tendencies in several expectation indicators in the industrialized economies have changed for the better, which could suggest they may be stabilizing. The production comeback in China and India, coupled with the reactivation of exports in other Asian countries, has stimulated commodity purchases and improved performance on the capital markets. However, the negative effects of the world crisis are expected to continue throughout the year. Most Latin American economies have confirmed a contraction in output growth during the early months of the year, as well as a pronounced drop in inflation. The sharp devaluation in Latin American currencies witnessed at the start of 2009 has been corrected in a context marked by a weak dollar and less risk perception for the emerging market economies.
The international crisis has affected Colombia primarily by dampening consumer and producer expectations and slowing exports and remittances. Available figures for the second quarter show the expectations of the business community and consumers reveal signs of recovery for the second half of the year, even though economic activity remains weak. Lending continues to grow at a good pace, fueled largely by commercial borrowing, and the performance of the financial system is still healthy. The Board of Directors expects interest rates on business and household loans to continue to fall.
The new cut in the intervention rate, coupled with the reductions approved since December 2008, which add up to 550 basis points, reflects an expansive monetary policy that promotes sustainable growth; in other words, growth in an environment of low and stable inflation. Much of the impact of these rate cuts on the economy will be seen in the next few quarters. Given the data available up to now, no further changes in the intervention interest rate are expected in the near future. The strong increase in money supply, less variation in food and regulated prices, a less negative external environment, and more momentum in civil works suggest economic growth will begin to recover gradually in the second half of the year.
The Board will continue to carefully monitor the international situation, inflation, economic growth, and the forecasts. It reiterated that monetary policy in the future will depend on the new figures that become available.
