August 31, 2017 / 8:45 PM / a year ago

TEXT-Colombia central bank statement on interest rate decision

BOGOTA, Aug 31 (Reuters) - Colombia’s central bank board lowered the benchmark interest rate by 25 basis points to 5.25 percent on Thursday, taking advantage of falling inflation to try to boost sluggish economic growth.

The following is a Reuters translation of the statement accompanying the bank’s decision:

In its session today the bank board decided to lower the intervention interest rate by 25 basis points to 5.25 percent. In this decision, the board took into account mainly the following aspects:

In July, annual inflation stood at 3.4 percent and average inflation measures at 4.9 percent, lower than those recorded a month ago. Analysts’ inflation expectations for December 2017 and 2018 stood at 4.16 percent and 3.64 percent, respectively. Those derived from public debt papers registered slight changes and are above 3 percent for 2018.

The effects of the strong supply shocks that diverted inflation from the target continue to be diluted. This is indicated by the deceleration of the consumer price index of food and the behavior of prices most sensitive to the exchange rate. The average of basic inflation measures declined more slowly as a result of the indexation of prices and the transitory effect of indirect taxes, which were already assimilated during the first months of the year.

The contribution of the consumer price index of food to the fall in annual inflation can be reversed for the remainder of the year. For this reason, the projections for that period suggest a slight increase in annual inflation.

External demand from the economies of the region remains weak, in contrast to developed economies. In the United States, inflation remains low and the likelihood of increases in the Federal Reserve interest rate for the remainder of the year has been reduced. Oil prices are close to the average estimated by the bank’s technical team for 2017 and Colombia’s terms of trade surpass the average low registered in 2016. In this environment, the peso has appreciated against the dollar.

In Colombia, gross domestic product growth for the second quarter (1.3 percent) was close to what was estimated by the technical team. Domestic demand accelerated more than expected due to the behavior of government consumption. The dynamics of household expenditure remained weak and gross capital formation recorded a low growth, although better than the one observed in the first quarter. Net exports depleted more than estimated growth, due to increased imports.

Available economic activity figures suggest that the slowdown in the economy bottomed out and that higher growth can be expected during the second half of the year.

Based on this information, the board considered the following factors in its decision:

- The weakness of economic activity and the risk of a deceleration beyond that compatible with the deterioration in the dynamics of income caused by the fall in oil prices. Recent indicators confirm excess capacity of the economy, although there is high uncertainty about its size.

- Uncertainty about the speed of convergence of inflation to the target of 3 percent. The mechanisms of indexation and the persistence of inflation continue to be reflected in the level of basic inflation indicators, which exceed the inflation target of 3 percent.

- The current level of the real reference interest rate is compatible with the convergence of inflation to the target and some indicators suggest that it is close to its neutral level, although there is uncertainty about that level.

In this environment, the board decided to reduce the intervention interest rate by 25 basis points.

The decision to reduce the interest rate was approved by four members of the board. Two voted to reduce the interest rate by 50 basis points and the remaining member voted not to change the interest rate. (Compiled by Julia Symmes Cobb; Editing by James Dalgleish)

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