BOGOTA, Oct 27 (Reuters) - Colombia's central bank unexpectedly lowered the benchmark interest rate to 5 percent on Friday, as policymakers seek a boost to economic growth even amid uncertainty about the rate of inflation.
The following is a Reuters translation of the statement accompanying the bank's decision:
The central bank board today decided to lower the intervention interest rate by 25 basis points to 5 percent. In this decision, the board took into consideration mainly the following aspects:
In September, inflation increased and stood at 3.97 percent. The acceleration of inflation was mainly explained by the higher rate of annual increase in the food consumer price index, due to a low base of comparison. The average of the four basic inflation measures continued to fall and stood at 4.58 percent.
Inflation for the last three months was lower than expected by the market and the bank's technical team. In this vein, the technical team reduced the inflation projections for this year and the next.
Inflation expectations registered slight changes. The analysts for December 2017 and 2018 are on average 4.07 percent and 3.58 percent, respectively. Those derived from public debt papers remain above 3 percent.
The direct effects of the strong transitory supply shocks that deflected the annual inflation from the target were diluted and the indicators of basic inflation continue to fall. It is expected that the effects of the indexation of prices and the increase of indirect taxes at the beginning of the year will be reduced and that, with this, inflation and basic inflation measures will converge to the target.
External demand continues to recover, mainly because of developed economies. Oil prices increased and the terms of trade are projected to finish the year above the average registered in 2016. In the United States, it is likely that the Federal Reserve will increase its policy interest rate for the remainder of the year. In this environment, the peso has depreciated against the dollar.
In Colombia, the technical team maintained the estimated growth for 2017 at 1.6 percent and increased its growth forecast for 2018 from 2.4 percent to 2.7 percent. However, this growth is below potential, which is why it is expected that the underutilization of the installed capacity of the economy will continue to expand.
New information suggests that the deficit of the current account in 2017 would be 3.7 percent as a percentage of GDP, registering a reduction compared to the figure of 2016 (4.4 percent). In 2018 this adjustment is expected to continue.
Based on this information, the board pondered the following factors in its decision:
The weakness of economic activity and the risk of a slowdown beyond that compatible with the deterioration in income dynamics caused by the fall in oil prices. Although the projection of the technical team on growth increased for next year, the output gap will continue to widen.
The better results of inflation compared to what was expected last quarter and better projections by the technical team for coming policy. This behavior has been registered for several of the sub-categories of the consumer price index, especially those for food and tradables without food or regulated items. These results suggest that the rate of convergence of inflation to the 3 percent target could be faster, although the uncertainty in this respect remains high.
Although it is expected that the orderly adjustment of the current account deficit of the balance of payments will continue, there are risks in the international environment that may affect this adjustment.
In this environment, when evaluating the previous balance of risks, the board considered it convenient to reduce the benchmark interest rate by 25 basis points, using the space associated with the best inflation projections for 2018. However, risks persist in the international environment that limit the countercyclical capacity of monetary policy in the future. Therefore, this reduction should not be understood as part of a continuous path of cuts.
The decision to reduce the interest rate was approved by five board members. The remaining two voted to maintain the rate. (Compiled by Julia Symmes Cobb; editing by Diane Craft)