In July 2017, total headline inflation stood at 3.4%, and the average of core inflation indicators posted at 4.9%. These figures are lower than those registered a month ago. This is explained largely by the rapid slowdown in food prices, after last year's peak in July, when its annual variation reached 15.7%. Thus, inflation is now within the target range as a result of the dissolution of the strong transitory supply shocks that diverted it from the target. However, the contribution of food CPI to the decline in annual inflation may reverse during the second half of this year. This would take place due to a statistical effect, given that the basis for comparison of these prices is low. It must be noted that inflation expectations to December posted at 4.1%, and those to twelve months at 3.6%.
2. THE EXTERNAL SECTOR
On the external front, the price of oil and the country’s terms of trade for the remainder of 2017 are somewhat lower than expected at the beginning of the year. However, they are still higher than the averages for 2016. External demand has accelerated in developed countries, but it is expected to continue weak in Latin America. In this context, the current account deficit deficit is being corrected in an orderly manner. At the beginning of the year, the main correction factor was the fall in imports, but the values exported since the second quarter have increased.
As for growth, the latest information from DANE compared with the second quarter of the year suggests that the output grew at an annual 1.3% rate, slightly higher than the 1.2% increase in the first quarter. Although this rate reveals that domestic demand is still weak, it suggests that the economy would have already hit bottom, and that for the second half of the year higher annual growth rates would be expected between 1.8%, and 2.0%. Some data suggest that consumption, which accounts for two-thirds of the aggregate demand, has improved. In any case, Colombia’s economic growth is above the Latin American average.
The sectors that led growth in the second quarter of the year were agriculture, financial services, and social and personal services. In contrast, mining exhibited a sharp decline. This trend began in mid-2015 and is mainly explained by the fall in international oil prices. The industry also experienced a significant contraction, after having registered growth rates above the average last year.
4. MONETARY POLICY
In the context of a weak activity, recent indicators point to excesses of the productive capacity of the economy, although there is still high uncertainty about its magnitude. The pace of convergence of some core inflation indicators to the 3.0% target is also uncertain, despite the fact that the total price index is already within the target range. It is worth mentioning that the current level of the real policy interest rate continues to be contractionary. In this context, the Board of Directors of the Central Bank decided to reduce the benchmark intervention rate by 25 bp in its last meeting, placing it at 5.5%. With this reduction, between December 2016 and July 2017, the policy interest rate has been reduced by 225 basis points.
Interest rates of the banking system have been reacting to this reduction of the benchmark interest rate. Preferential credit rates have lowered more than the policy rate. There have also been significant declines in interest rates on ordinary loans, microcredit, and mortgage credits. On the other hand, consumer credit rates have not reacted so quickly. Compared with other Latin American countries, the policy rate is at an average level, and it is expected to be lower than in the most important Latin American countries in 2018.