A Larger Interest Rate Cut by the Central Bank of the Republic of Colombia

March 22, 2013

Monetary policymakers in Bogota eased policy for the fifth straight month and for the seventh time since their meeting last July.  While the first six rate cuts were by 25 basis points, the increment was doubled to 50 bps today.  The accrued reduction of 200 bps over this span offsets all by 25 bps of the tightening done between February 2011 and February 2012, and a statement posted on the central bank’s website in Spanish indicates a readiness to ease further if future economic information so indicates.  Three reasons are given for today’s larger cut:  sub-potential economic growth, sub-target inflation, and diminished impact on the economy from rate cuts (it takes a bigger punch to achieve the desired result).

The Board of Directors of the Banco de la Rep├║blica at its meeting today decided to reduce the reference rate by 50 basis points. In this way, the rate base for the expansion to one day auction stands at 3.25%. The decision was made taking into account that the Colombian economy is growing below its potential, and probably it will operate in coming quarters below its productive capacity, and observed and projected inflation lie below the 3% target. This in a context in which the reductions in interest rates seem to be transmitting to the economy more slowly than desired.

Colombia actually has decent growth, but at 4.0% in 2012 such was down from 6+% previously.  CPI inflation of 1.8% compares to a target band of 2-4%.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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