Colombia’s central bank could cut its key interest rate by another 100 basis points this year to lift growth, central bank governor Juan Jose Echavarria said on Monday, predicting that inflation would hit his 3 percent target in late 2018.
Policymakers in Latin America’s fourth-largest economy reduced rates by a quarter point in late May following a 50 basis-point cut in April. However, the board had been divided between those concerned about a further climb in inflation and those worried about growth figures.
“On the growth side the economy is slowing down or not growing much, and on the inflation side we have good news but not good enough,” Echavarria told Reuters in an interview.
But he added: “We hope we can decrease 100 additional (basis) points throughout the rest of the year.”
Colombia’s economy, which has been hit hard by the slump in global oil prices, grew 1.1 percent in the first quarter, below the central bank’s estimate of 1.3 percent.
Meanwhile, data showed consumer prices rose at a slower pace in May with annual inflation at 4.37 percent, closer to the central bank’s long-term target of 2-4 percent. Echavarria himself has described 3 percent as an ideal target.
“My bigger concern is always inflation because we are still far from 3 percent,” he said, adding that while falling food prices would eventually help drive inflation down to 3 percent by late-2018, room for policy easing could in the meantime be limited.
“If we want to be close to 3 percent, this is not going to be very easy, so I fear we will be on the restrictive side most of the time.”
Echavarria was optimistic economic growth could come in slighlty above the central bank’s forecast of 1.8 percent in 2017. The rate of expansion could speed up to 2.5 percent next year helped by a revival in tourism and the agricultural sector.
Recent meetings with business people across the country had painted an uneven picture, Echavarria said.
While businesses in the capital Bogota were suffering, a peace deal struck between the government and Revolutionary Armed Forces of Colombia (FARC) late last year had led to a revival of tourism along the Atlantic coast.
The peace deal could allow an extra 0.5 percent of GDP growth per year, Echavarria estimated.
On the other hand, presidential and legislative elections in 2018 would add uncertainty, he warned.
“It will be difficult to undertake meaningful structural reform during the next year.”
While Colombia – like much of Latin America – depends heavily on the performance of the U.S. economy, Echavarria expected little impact from U.S. interest rate rises.
“We see U.S. companies are investing,” he said. “I hope (U.S. President Donald) Trump’s ideas about trade will not be too terrible for the U.S. economy.”
(Reporting by Karin Strohecker; Editing by Hugh Lawson)