Colombia’s central bank cut its key interest rate 0.5 percentage points and spurring speculation the country’s economy will need more effort to recover growth.
Analysts had predicted the bank would cut the rate with only 25 basis points.
However, the central bank said it observed an “increasing weakness of the economic activity, and the risk of an excessive slowdown.”
In this context, the Board of Directors considered that a 50 bp reduction is in line with the risk balance and is consistent with the objective of reaching a 3.0% inflation target in 2018. Additional reductions will depend on the balance of risks, between a slow convergence of inflation to 3.0% and an excessive slowdown on the economy.
Colombia’s Central Bank
“Leading economic indicators suggest that Latin America’s fourth-largest economy will continue to struggle in the near term,” the Financial Times reported.
According to Finance Colombia, a website specialized in the country’s economics, the bank’s larger-than-expected reduction “signals that the bank members are now more concerned about underwhelming economic data than inflation” that dominated economic concerns throughout 2016.
Colombia’s economic growth got in trouble in mid 2014 when the prices of crude oil, the country’s largest export product, dropped.
In the years before, it had enjoyed increased foreign investment in its oil industry and increased oil exports, spurred by an increase in demand, mainly from China.
However, small business and export sectors like agriculture and manufacturing suffered an expensive peso and were less able to develop, just when a series of free trade agreements forced them to increase competitiveness.
When oil and other commodity prices dropped, foreign investors lost interest in Colombia’s natural resources, the peso dropped and inflation increased.
With hardly any of the oil revenue invested in education or the diversification of the economy, the government embarked on major public investment in free housing and infrastructure to keep the economy running.
However, this has since virtually eliminated the country’s financial reserves.
Lowering the interest rate could convince domestic private enterprises to increase their investment.