Colombia Cuts Policy Rate and Signals End to Monetary Easing

(Bloomberg) -- Colombia’s central bank cut borrowing costs to try to revive the weakest economy in a decade and signaled that this brings to an end a phase of monetary easing that began more than a year ago.

The seven-member board voted to cut the benchmark policy rate 25 basis points to 4.5 percent, central bank Governor Juan Jose Echavarria told reporters Monday. The decision was predicted by 19 of 36 analysts surveyed by Bloomberg, with the others expecting no change.

“With the information available, the board considers that this completes the cycle of interest rate reductions,” Echavarria said, reading the bank’s statement.

The central bank has now cut the key rate by 3.25 percentage points since December 2016 as the economy grew at its slowest pace since the global financial crisis, with sluggish consumer demand and a rising jobless rate. Finance Minister Mauricio Cardenas, who has repeatedly argued for cuts over the last year, also told reporters that the space for monetary easing has now run out.

Andres Langebaek of Davienda, the economist with the best track record of forecasting Colombia rate moves in Bloomberg surveys, said that signaling the end of cuts “seems sensible”, and predicts that the policy rate will still 4.5 percent at the end of the year.

One thing that could change that is if the recent rise in crude prices persists, causing the central bank to lift its estimates of potential growth, which would allow it to “re-evaluate monetary policy” and possibly lower rates further, Langebaek said.

“If, in two months, we continue to see forecasts from oil analysts of $60 dollars or a bit more, there would be space,” for more cuts, he said. Higher prices for oil, the nation’s biggest export, also cause the peso to rally, helping the bank hit its inflation target, he added.

The central bank forecasts that the economy will grow 2.7 percent this year, which Echavarria has said is insufficient, and short of its potential of about 3.3 percent.

Cardenas warned on Jan. 23 that room for further rate cuts was limited, and that if the economy needed more stimulus “it’s better to do it early,” distancing decisions from this year’s elections. Colombia will hold congressional elections in March, and elect a new president in May, with a run-off vote in June.

The peso has rallied 4.9 percent so far this year, the most in emerging markets after the Mexican peso. Consumer prices rose 4.1 percent in 2017, exceeding the 2 to 4 percent inflation target for a third straight year.

To contact the reporter on this story: Oscar Medina in Bogota at omedinacruz@bloomberg.net.

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Philip Sanders

©2018 Bloomberg L.P.