It Took a Pandemic for Colombia to Finally Cut Interest Rate

(Bloomberg) -- Colombia’s central bank cut borrowing costs for the first time in two years at a regularly scheduled meeting as the economy reels from the oil price crash and the coronavirus pandemic.

Policy makers voted unanimously to cut the key rate to 3.75% the lowest in six years. Twelve analysts surveyed by Bloomberg had forecast the cut, five expected a quarter-point drop, five forecast no change and one predicted a larger reduction of 0.75 percentage point.

The bank said it has room for further cuts if needed, and also announced additional measures to boost liquidity via auctions of non-deliverable forwards and currency swaps.

“The country and the economy are facing a situation without precedent,” central bank Governor Juan Jose Echavarria said in a statement after the meeting. The cut will “contribute to the future recovery of internal demand once the markets have returned to functioning normally,” he said.

Every other major central bank in the region has already lowered rates in emergency meetings this month, as lockdowns and travel restrictions cause economic activity to slump.

Emerging market assets have crashed everywhere since the pandemic shuttered swathes of the global economy, but Colombia has been among the hardest hit. The benchmark Colcap index has fallen 37% in dollar terms this month, the worst performance in the world after Brazil, while the peso weakened to a record low.

Colombia’s Central Bank to Buy Corporate Debt to Calm Market

Liquidity Measures

The central bank has held four unscheduled board meetings in recent weeks, and announced a series of measures intended to boost liquidity in local markets, including the purchase of corporate and sovereign debt, and the auction of FX swaps. After today’s meeting, the bank said it would auction another $1 billion in non-deliverable forwards, and $400 million in currency swaps.

Last year, Colombia had the fastest-growing major economy in the Americas, and held aloof as peers such as Brazil, Mexico and Chile cut rates.

Colombia’s economy will contract 2.5% this year, according to a report published today by Goldman Sachs, from a forecast of 3.4% growth before the virus hit. Brazil, Mexico, Chile and Argentina will suffer even deeper contractions, Goldman said.

The government of President Ivan Duque closed borders, suspended incoming flights and imposed a three-week lockdown to try to curb the spread of the virus. Colombia has reported nearly 500 confirmed cases of the virus, and six deaths.

The economy was also hit by the slump in the price of oil, the nation’s biggest export. S&P Global Ratings, which rates Colombia one notch above junk, yesterday revised its outlook to negative from stable.

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