Colombia Cuts Interest Rate to Record Low in Split Decision

(Bloomberg) -- Colombia cut its key interest rate to a record low on Friday to combat a slump that the finance ministry forecasts will be the deepest in the nation’s history.

The central bank cut the rate by half a percentage point for a third straight month, to 2.75%. The decision was in line with expectations. Five policy makers voted for the move, while two argued for a more modest cut of a quarter percentage point.

Colombia has so far been relatively unscathed by the coronavirus pandemic, with fewer confirmed infections than its neighbors. But the lockdown has taken a heavy toll on the economy, devastating the service sector, driving the national airline into bankruptcy and throwing millions out of work.

Output will contract between 3% and 7% this year, according to the central bank’s forecast. Inflation will slow to between 1% and 2% by the end of the year, below its 3% target, central bank Governor Juan Jose Echavarria said, in a press conference.

Policy makers in Chile and Peru swiftly slashed interest rates close to zero when the crisis hit, but Colombia has adopted a more cautious approach.

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“The bank continues to believe that lowering rates right now is worthwhile, but that doing it aggressively doesn’t make much difference at a time when the economy is basically closed,” said Daniel Velandia, head of research at Credicorp Capital’s Colombia unit, in an interview ahead of today’s decision. “The bank will continue to cut rates gradually so as not to use its ammunition too quickly.”

The economy has also been hit by sharp downturns in export markets such as the U.S. and Ecuador, and from the drop in prices for its oil, coal and coffee.

The jobless rate in Colombia’s thirteen biggest cities soared to a record of 23.5% in April. The finance ministry forecasts that the economy will shrink 5.5% this year, which would be its worst performance since records began in 1905.

Colombia has had about 25,000 confirmed cases of the virus to date, compared with 87,000 in Chile and 136,000 in Peru.

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