Colombia Holds Policy Rate at 7.75% as Inflation Rate Dives

  • President Santos has said bank can now consider rate cuts
  • Decision to leave borrowing costs unchanged was unanimous

Colombia’s central bank left borrowing costs unchanged for the second straight month, with Finance Minister Mauricio Cardenas saying a downturn in inflation needed to be consolidated before policy makers could cut rates.

The seven-member board voted unanimously to keep the benchmark interest rate at 7.75 percent, central bank Governor Jose Dario Uribe told reporters in Bogota. The decision was forecast by all 33 analysts surveyed by Bloomberg. Last month, one of the board members had voted to raise the rate to 8 percent.

“The Colombian economy continues to adjust to the strong shocks felt since 2014, and the current account deficit is gradually reducing,” Uribe said, reading the policy statement. “The effects of the transitory supply shocks that have affected inflation and expectations have started to revert, and this trend is expected to continue.”

The inflation rate plunged in August by the most in seven years, dropping to 8.1 percent, after food supplies recovered following a drought earlier in the year. Cardenas, who sits on the monetary policy committee, told reporters that Colombia can concentrate more on economic performance once there is certainty that inflation expectations are anchored to the target. Inflation is still more than double the bank’s 2 percent to 4 percent target range.

“The evidence is very strong that inflation is falling, and also that we have an economic slowdown,” said Andres Langebaek, the head analyst at Banco Davivienda, who forecasts that the bank will cut interest rates before the end of the year.

Industrial production and retail sales fell 6.2 percent and 3.3 percent, respectively, in August, surprising economists who had forecast that both indicators would increase. Uribe said this negative data was partly due to temporary factors and that the impact of the truckers’ strike was greater than the bank had forecast.

President Juan Manuel Santos said this week that Colombia can start to think about rate cuts to stimulate growth now that inflation has peaked.

As well as Cardenas, three other members of the bank’s board indicated this month that the nation’s inflation outlook needs to improve before they’ll consider cutting borrowing costs. Policy makers have pledged to have inflation within the target range by the end of next year.

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