Colombia Cuts Key Rate in Likely Last Move of 2017

  • Quarter percentage point reduction was priced in by traders
  • Inflation has fallen to its lowest level in three years

Colombia’s central bank board reduced borrowing costs Thursday in what many expect to be its last move of 2017 as policy makers gauge the impact of eight rate cuts since December. The seven-member board split three ways.

A majority of the policy makers voted to cut the policy rate by a quarter-point to 5.25 percent, central bank Governor Juan Jose Echavarria told reporters. Four members voted for the quarter-point cut, while two wanted a half point reduction, and one wanted to leave the rate unchanged. The decision was forecast by 35 of 37 analysts surveyed by Bloomberg, while two had predicted a half point cut.

Policy makers have trimmed interest rates by 2.5 percentage points since December as growth slowed to its weakest rate since 2009 and inflation cooled after more than two years above the target range. Having two board members arguing for a deeper cut leaves the door open for further monetary easing, said Camilo Perez, head of research at Banco de Bogota.

“The voting is pretty surprising,” Perez said in a phone interview. It raises the “possibility that there are additional cuts in what’s left of the year.”

Banco de Bogota’s base scenario is still that they’ll leave rates unchanged for the rest of 2017, he added.

The economy, which is still adjusting to the 2014-15 drop in oil prices, reached its lowest ebb in the first two quarters and is set to pick up in the second half of the year, Echavarria said. The annual inflation rate fell to 3.4 percent in July, its lowest level since since 2014, while core inflation, which excludes the most volatile products, also dropped.

“The current real interest rate is compatible with the convergence of inflation over the policy horizon, and some indicators suggest that it’s close to its neutral level,” Echavarria said, reading the bank’s policy statement.

Analysts surveyed by the central bank before today’s decision forecast that policy makers’s next move will be to initiate a new phase of interest rate cuts starting in January.

Gross domestic product grew 1.3 percent in the second quarter, faster than the central bank expected, though it remains one of the weakest growth rates since the global financial crisis. The central bank this month lowered its 2017 growth forecast to 1.6 percent, which would mark the weakest pace in almost a decade.

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