An Interest Rate Trend Reversal in Colombia

July 28, 2012

The previous nine changes in the overnight lending rate of the Central Bank of the Republic of Colombia had all been increases of 25 basis points.  This tightening was undertaken from February 2011 to February 2012 and had raised the benchmark from 3.0% to 5.25%.  The Board of Directors had not changed the stance at meetings from March to June, and that was the expected result by most analysts of yesterday’s meeting.  Instead, officials cut the key rate to 5.0% and cited global economic risks that impelled them to lower their forecast of Colombian growth this year.  Industrial production and export demand have weakened significantly already, not just because of slower world growth but also in response to a more expensive peso and lower commodity export prices.  Meanwhile, CPI inflation in the low 3’s remains benign.

Several Latin American monetary authorities switched policy gears before Colombia’s central bank did, notably the Bank of Brazil.  Colombian authorities had stayed tenaciously hawkish because of the strength in bank lending, but that factor is now outweighed by the abrupt slowdown of export growth.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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