The Central Bank of Colombia (el Banco de la Republica) announced that “after assessing the risk balance for inflation and growth, the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered.”
This decision contrasts Brazil’s recent decision to lower the benchmark interest rate in an effort to improve economic growth (see “Yesterday’s News: Brazil’s Dilemma“). However, these two opposite decisions make perfect sense when you look at economic growth in Colombia and Brazil.
As reported by Reuters, data from the Central Bank on inflation show a large drop in September compared to July: 7.27 percent and 8.97 percent, respectively. However, inflation remained higher than 3 percent higher than the Central Bank’s target of 2 to 4 percent.
Data from the Central Bank of Colombia show how inflation has risen in the past two years. Colombia has seen inflation rise and fall several percent every few years over the last two decades. The latest spike in inflation began in late-2014 and has been attributed to the fall in oil prices and rise in food prices. Bloomberg reports that “Colombia’s annual inflation rate continued its sharp drop toward the central bank’s target as food supplies improve following a drought, and a stronger peso cools the rise in import costs.”
In order to combat inflation, the Central Bank slowly raised the benchmark interest rate from September 2015 through July 2016. At its last meeting in September, the Central Bank left the benchmark interest rate unchanged at 7.75 percent.
Brazil has struggled in recent years to control inflation, which remains above 8 percent. However, Brazil’s Central Bank (Banco Central do Brazil) predicts a steady fall in inflation for the next 10 quarters and falling within its target by 2018.
In its World Economic Outlook for October 2016, the International Monetary Fund predicts that Colombia’s economy will expand in 2016 and 2017, while it predicts the Brazilian economy to contract in 2016 and grow slightly in 2017.
Colombia’s modest growth means that it can afford to prioritize inflation reduction over economic growth, unlike Brazil. However, if Colombia’s modest growth falls in the near future, it may pressure the Central Bank to interest rates.
Indeed, one member of the Central Bank’s board of directors (Junta Directiva) has said as much. El Portfolio reports that the board member “noted that data for the last month show that the balance of risks is tilted towards slower growth than to inflation.”
The recent (in)action by the El Banco de la Republica to maintain interest rates shows its prioritization of inflation control over economic growth. However, its decision was a cautious one and one that, as the board member points out, may need to be reaccessed if growth begins to slow.