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Published On: Sun, Apr 30th, 2017

Central Bank of Colombia cuts interest rates to 6.5%

nsnbc : The Central Bank of Colombia cut its key interest rate by 05% to 6.5%, surprising many experts who had expected a cut by0.25% only. The bank explained it observed increasing weakness of the economic activity and the risk of an excessive slowdown” of the economy.

Central Bank og Colombia, Bogota. Courtesy Camilo Sanchez CC 3.0

Central Bank of Colombia, Bogota. Courtesy Camilo Sanchez CC 3.0

The Central Bank of Colombia stated  that in this context, the Board of Directors considered that a 50 bp reduction is in line with the risk balance and is consistent with the objective of reaching a 3.0% inflation target in 2018. Additional reductions will depend on the balance of risks, between a slow convergence of inflation to 3.0% and an excessive slowdown on the economy.

Colombia’s economic growth came under stress in mid-2014 when global crude oil prices slumped. Oil is Colombia’s primary export product and source of foreign reserves. Countries including Saudi Arabia which caused the problem by selling oil for dumping prices, as well as neighboring Venezuela, Russia and others also suffered from the temporary freefall of the oil price.

Prior to mid-2014, Colombia had enjoyed increased foreign investment in its oil industry and increased oil exports. The rise in exports prior to mid-2014 was primarily driven by increase demand from China which increased imports from both Colombia and neighboring Venezuela.

Recent developments confronted small businesses including small transport businesses, agriculture and manufacturing with an expensive peso. This development happened to coincide with the signing of free trade agreements and growing international competition. When oil and other commodity prices dropped, foreign investors lost interest in Colombia’s natural resources, the peso dropped and inflation increased.

The government attempted to compensate for the lack of investment of oil revenue in the diversification of the economy by embarking on major public investment, free housing and infrastructure to keep the economy up and running. While stimulating and probably needed, this policy drained Colombia’s foreign currency reserves. The bank apparently attempt to revitalize the economy. The interest rate hike aims to stimulate domestic private businesses to increase their investment.

A/N – nsnbc 30.04.2017

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