Colombia Central Bank Statement

Author: | Published: 19 Oct 2018
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Colombia adopted an inflation targeting regime in 1999, a strategy which has proved to be very successful. Exchange rate flexibility has allowed a better adjustment of the economy in the presence of relatively (when compared to other Latin American countries) large external and internal supply shocks. Between 2014 and 2016 the economy simultaneously faced the drop in oil prices, the climate effect of a severe El Niño and a truckers' strike. Exchange rate flexibility has allowed monetary policy to focus on maintaining a low and stable inflation, and on short-term output stabilisation.

Increased credibility in the Central Bank's policies has kept inflation expectations relatively close to the target, but the size and persistence of these shocks threatened to de-anchor inflation expectations and obliged the Board of the Central Bank to initiate a cycle of increases in the policy rates. Once inflation began to recede and economic growth slowed down, the Board decreased rates from 7.75% in December 2016 to 4.25% at its meeting last April. Monetary stance is relatively loose today.

External and internal conditions look much more favourable in 2018; inflation is close to the target of 3.0% and growth is accelerating. International oil prices have increased markedly in recent months and advanced economies are finally growing. This new favourable international environment has played a part in the better performance of non-traditional exports and services.

On the domestic front, the reduction of interest rates has stimulated consumer demand and large investment in civil works will continue to contribute significantly to growth. We expect economic activity will improve and converge towards Colombia´s potential growth of 3.5% in 2019.

Risks are high and have probably increased in recent months. Monetary, fiscal and trade policy in advanced economies (particularly in the US) could have an unfavourable impact on Colombian growth. The volatility of financial markets can increase if interest rate rises in the US are larger than anticipated. A depreciation of the Colombian peso could affect domestic prices, moving inflation far from our target.

Future monetary policy decisions will depend strongly on inflation and growth expectations. The economy is still growing below potential, and inflation expectations are above the target (i.e. between 3.3 and 3.5%). The financial sector in Colombia looks strong and healthy, though bad debts have increased and there are important financial investments in some Central American countries like Panama, El Salvador and Costa Rica. Those countries import oil and are also subject to potential US financial shocks. We constantly monitor the behaviour of the financial sector (together with the other governmental authorities responsible for its regulation). Other policy challenges remain. There is always space to improve communication and transparency in monetary policy decisions.

 


 

 

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