A regular meeting of the Board of Directors of Banco de la República took place in the city of Bogotá D.C. on Friday, November 24, 2017. In attendance were Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit; Juan José Echavarría, Governor of the Central Bank; and Board Members Gerardo Hernández Correa, Ana Fernanda Maiguashca Olano, Adolfo Meisel Roca, José Antonio Ocampo Gaviria, and Juan Pablo Zárate Perdomo.
These minutes contain a summary of the outlook on the macroeconomic situation by the technical staff of the Central Bank (section 1), followed by a review of the main discussion regarding monetary policy by the Board of Directors (section 2).
Further detail on the macroeconomic situation prepared by the technical staff from the Central Bank will be presented in the monthly Monetary Policy Report for October 2017 and in the statistical annex (Only Available in Spanish).
1. MACROECONOMIC CONTEXT
In summary, to December 2017, inflation is expected to finish slightly below 4.0% and decline in the first quarter next year, partly as a result of the reversal of the transitory shocks that have diverted it from its target. This takes place in an environment of economic activity that is weaker than expected. Monetary policy actions undertaken so far, which consider these effects, should strengthen convergence of inflation to its target.
2. DISCUSSION AND POLICY OPTIONS
The Board of Directors highlighted the decreasing trend of inflation. This behavior has been better in the last months than the forecasts of the Central Bank´s technical staff, and than the market´s expectations. On the other hand, core inflation exhibited a systematic decline during almost the entire year. Furthermore, the technical staff´s forecasts indicate that in December inflation will post below 4.0% and there is a high probability that next year it reaches its 3.0% target. Conversely, data on the productive activity show that, although the economy is in a reactivation process, it is still very slow and far from the potential rate of GDP growth. Additionally, the external accounts show an improvement, owing both to the increase in the prices of commodities and to the already positive growth of the volume of exports, including non-mining products and services.
Five of the seven Board Members voted for an additional reduction of the benchmark interest rate by 25 bp. This outlook recognizes that inflation is moving in the direction of reaching the Central Bank´s target, and there is a slight improvement in the external gap, although there is still a significant expansion of the output gap. This is due, above all, to the weakness of domestic demand, as is reflected in the growth reduction of said variable in the third quarter vis-à-vis the second quarter, and the weakness that consumer surveys reveal to the industry and to commerce in the available data for the current quarter.
The other two members voted to maintain the policy rate unaltered. In their judgment, this outlook is consistent with what was announced during the last Board meeting that the 25 bp reduction should not be understood as a continuous path of cuts. Moreover, they highlighted that there is still uncertainty regarding the forecasted fall in inflation for the first months of 2018.
3. POLICY DECISION
The Board of Directors of the Central Bank of Colombia decided to reduce the benchmark interest rate by 25 bp to 4.75%.
The decision to reduce the benchmark interest rate was approved by five (5) members of the Board. The two (2) remaining Board Members voted to maintain the policy rate unaltered at 5.0%.
Bogotá DC, 7 December 2017