Colombia Central Bank Statement

Author: | Published: 5 Sep 2017
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Since mid-2014, Colombia has had to adjust to several adverse events of diverse nature and magnitude, which arose on both the external and domestic fronts. Fortunately, the Colombian economy has responded better than other countries in the region. The orderly adjustment facing these shocks has been possible largely thanks to appropriate economic policy responses, both monetary and fiscal; to the robustness of the financial system; and to the existence of other natural stabilisation mechanisms of the economy such as the flexibility of the exchange rate.

The combined effect of these events deepened the macroeconomic imbalances already existent in the country, to which the economy has had to adjust. The oil shock implied a significant deterioration in the country's terms of trade, leading to a widening of the current account imbalance and, at the same time, to deterioration of public finances, given the strong dependence of the country on oil revenues. The lower income from exports, along with increases in the country's risk premia, generated a significant depreciation of the peso, which, together with domestic supply shocks and the activation of indexation mechanisms, led to an increase in inflation, causing it to post outside the target range set by the Central Bank (between 2% and 4%).

The deterioration of national income led to a weakening of domestic demand, which, linked to a fragile external demand, explains the slowdown of economic growth in the past two years. Thus, the high levels of inflation were accompanied by a significant slowdown in growth.

This situation posed a strong dilemma to the authorities and for the monetary policy response. In the beginning, in order to enable convergence of inflation back to the Central Bank's target and to keep inflation expectations under control, the Board of Directors of Banco de la República began an upward cycle of the benchmark interest rate, taking it from 4.5% in September 2015 to 7.75% in July 2016. Ending last year, inflation began to recede, and, inasmuch as different economic activity indicators suggest that the slowdown could be greater than expected, the Board started a downward cycle of the benchmark interest rate, placing it at 5.75% at its meeting last June.

Hence, the monetary policy response has had to adapt to the new conditions of the economy, simultaneously facing high inflation and slowdown of economic activity. Toward the end of this year, inflationary pressures are expected to have faded and inflation will once again approach its long-term 3% goal. In June, the annual inflation rate was 3.99% and we expect inflation to be very near to 4% in the rest of 2017 and 3.5% on average during 2018.

Our growth forecast for 2017 is 1.8% and, for 2018, 2.1%, with a gradual convergence to the potential growth. Achieving this goal will require structural reforms that do not depend on the Central Bank, but on the government, businesses and society in general.

Regarding the financial sector, Colombia has been adopting the requirements of Basel III gradually and these are not expected to have a significant impact on the financial system and the credit conditions of the economy. In terms of the sector's liquidity, it is worth mentioning that liquidity risk is not a current concern. Finally, deceleration of credit growth and the existence of new conditions for the placement of subordinated debt by the financial intermediaries will facilitate increasing the banks' solvency.

 


 

 

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