At the bank’s Dec. 20 meeting, some of the seven board members cited evidence that gross domestic product can expand at a faster pace without stoking inflation as a reason why lower borrowing costs may be appropriate, according to the minutes published today.
Given persistent below-target inflation, the board will evaluate “the monetary policy rate in view of the indications that the potential GDP could be higher than estimated,” according to the minutes. “Because of this, it could be necessary to make adjustments in order to hasten the convergence of inflation with the target and the closing of the output gap.”
Annual inflation fell to its lowest rate since 1955 last month, even as the economy grew at the fastest pace in the Andean region, fueling a debate within the central bank over whether it has underestimated the economy’s sustainable growth rate. The board voted unanimously to hold its key rate at 3.25 percent for a ninth straight month in December, after cutting borrowing costs seven times from July 2012 to last March.
Central bank economists are preparing a report on potential GDP ahead of the bank’s January policy meeting, Finance Minister Mauricio Cardenas said in a Dec. 30 interview.
Cardenas, who chairs the monetary policy meetings, estimates that the economy’s full potential growth rate is closer to 5 percent than to the central bank’s current estimate of about 4.5 percent.
“It’s a more dovish message, which is telling us that the probability that you are going to have consensus voting to withdraw of monetary stimulus is lower than the market was thinking,” said Francisco Rodriguez, senior Andean economist at Bank of America.
The different opinions on the policy committee mean that the “middle position” of holding interest rates for a long period will probably prevail, Rodriguez said.
Inflation slowed to 1.76 percent in November, the lowest among major Latin American economies. Some board members argued that the low inflation rate is largely caused by temporary factors, and that one-year inflation expectations are close to the midpoint of the target range. Colombia targets inflation of 3 percent, plus or minus one percentage point.
The economy grew 5.1 percent in the third quarter from a year earlier on a rise in home building and an improved coffee harvest. That’s faster than regional peers including Brazil, Mexico, Peru, Chile and Venezuela, while trailing Argentina’s 5.5 percent growth.
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