Colombia’s Central Bank on Friday announced that it has cut interest rates to 3.75%, making it the lowest of all Latin American countries by a comfortable margin.
“The decision was made after taking into account that the Colombian economy is growing below its potential, and because observed and projected inflation is comfortably below the goal of 3%, with no upward pressure expected in the near future,” the bank announced.
The bank contributed the low inflation rate in part to tax reform measures, which resulted in a fall in the prices of various consumer goods, and was in turn reflected in the consumer price index from which the inflation rate is derived from.
The move comes after Colombian President Juan Manuel Santos urged the central bank to lower interests in order to halt the country’s economic slowdown. The country’s finance minister, Mauricio Cardenas, echoed the president’s statements claiming conditions “were ripe” for another reduction.
The reduction does not come as a surprise to analysts, who had predicted the move due to a combination of a downturn in the economy and low inflation rates. The finance minister pointed out that the bank had to take into account market conditions in the eurzone, Colombia’s free trade agreements, and Venezuela’s severe devaluation of its currency. One risk Cardenas was especially sensitive to when it came to letting interest rates fall too low, was the effect on household debt.
According to Juan Dario Uribe, the central bank’s president, the bank’s policy decisions are to a great extent a response to high levels of household consumption, a slowdown in civil works projects and housing construction, and the economic slowdown which occurred during the third quarter of 2012.
Two new directors were added to the central bank’s staff recently – Alfredo Roca Meisel and Ana Fernanda Maiguashca – both of whom come from non-political backgrounds. The new composition aside, the results remained the same. The bank has now lowered interest rates in five out of their last seven meetings.
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- Economic Acceleration and Structural Reforms (Banco de la República)