Central Bank Head Sees Room to Cut Colombia Rate as CPI Easesby and
Board is working on improving communications with investors
Uncertainty about nation’s potential growth after oil decline
Colombia can cut its policy rate toward a more neutral level as inflation data improve, according to the head of the nation’s central bank.
The current real, or inflation-adjusted, rate remains “high and restrictive” and can be brought down through borrowing-cost reductions as consumer price increases slow, according to Governor Juan Jose Echavarria. No one knows exactly what the long-term neutral rate is, but many estimates place it at 1 or 2 percentage points above inflation, he said.
“Because inflation is behaving very well, we see more room for maneuver in terms of moving from a very restrictive rate to a less restrictive rate,” Echavarria said Friday in an interview in Washington. “Our real rate is around 3 percent, so we have move to 1.5 percent, something like that.”
The central bank’s member board is split over whether the bigger risk at the moment is high and persistent increases in the cost of living or a sharp slowdown in growth. Policy makers have cut the benchmark rate in quarter point increments at three of their last four meetings. Finance Minister Mauricio Cardenas is pushing for faster monetary easing, while one other board member voted to leave the rate unchanged in the most recent decision.
Colombia’s growth rate has slowed significantly since the nation’s oil boom ended after crude prices slumped in 2014 and 2015. Echavarria said there’s a lot of uncertainty about what the country’s long-term sustainable growth rate now is, but it could be about 3.5 percent. He said it has come as a“real shock” to policy makers that the country can no longer grow at rates of 4.5 percent or 5 percent.
Consumer confidence fell to a record low in the first quarter, while other data also appear to point to weaker-than-expected growth. Retail sales fell the most in seven years in February, while industrial output also contracted and credit growth slows. Still, the economy shouldn’t have a "hard landing," Echavarria said, tapping his knuckles on a wooden coffee table as a gesture to avoid tempting fate.
Echavarria said inflation will cool to about 4 percent by the end of the year, from 4.7 percent in March. Consumer price rises have been above the bank’s 2 percent to 4 percent target range for more than two years.
The bank will cut its policy rate another quarter percentage point at its April 28 meeting, to 6.75 percent, according to 14 of 20 analysts surveyed by Bloomberg, with the other 6 predicting a half-point cut.
Policy makers need to work on improving their communication, which should be easier once the board, which currently has six members, is back to its full seven in May, he said. Two of the bank’s past three rate decisions surprised traders.
"We’re working hard in order to explain to people why we take these decisions," he said. "I’m worried about these communication issues, but not too worried."