BOGOTA (Reuters) - Colombia’s central bank may have scope for further cuts in the key interest rate after a surprise slowdown in inflation that will lead it to close the year within target amid expectations of weak economic growth, a central bank policymaker said.
Last month annual inflation unexpectedly eased to 3.4 percent, its lowest level in more than 2-1/2 years, prompting central bank board member Jose Antonio Campo to bet it could settle by year-end within the bank’s elusive official target of 2 percent to 4 percent.
“It was better than the whole world expected,” Ocampo said late on Thursday in an interview for the Reuters at the Latin American Investment Summit.
“I immediately sent a message to my colleagues on the board saying we are going to end up (this year) within the target range; we will be slightly below 4 percent,” he added.
Even though Ocampo expects consumer prices to pick up again this year, he is the first board member to publicly predict inflation to fall into target range by the end of 2017.
The seven-member board has been grappling for more than two years with the twin pressures of a weak economy, caused by the global drop in oil prices, and inflation that in July 2016 reached almost 9 percent.
In assessing the scope for rate cuts, Ocampo said he not only looked at the overall inflation figure, but also “basic inflation,” a core measure.
Basic inflation excludes food prices and some regulated prices like fuel, utilities and transport which are beyond the control of monetary policy.
“As basic inflation falls we also have a little more room to discuss further interest rate cuts,” said Ocampo, a former finance minister who has a doctorate in economics from Yale University.
Another important variable to consider for additional rate cuts is gross domestic product data, which will be released for the second quarter on Tuesday.
“I think next week’s data is going to be rather negative,” Ocampo said at his Bogota office.
The central bank has cut 225 basis points from the benchmark rate since the trimming cycle began in December, leaving it at 5.50 percent last month.
Recent surveys of economists by Reuters and the central bank found that policymakers would likely cut the rate by another 25 basis points in August and then hold it through the end of the year. Cuts would continue in 2018 to bring it to 4.50 percent.
The bank expects GDP growth of 1.8 percent this year following a 2 percent expansion in 2016.
Ocampo however sees 2017 growth weakening to 1.5 percent.
“Curiously I have been the pessimist about this year, I was among the first to talk about growth being 1.5 percent, but I’m optimistic about next year,” he said.
He saw economic growth of about 3 percent in 2018 as lower inflation along with interest rate cuts reactivate internal demand and provide consumers with more spending power.
There has also been a pickup in exports of non-traditional exports, he said.
Although Ocampo said it was too early to make interest rate projections for 2018, he did not rule out further reductions.
“Obviously if productive activity continues to be weak, although I am more optimistic in that matter, one could eventually enter the expansive range ... but it is still very early.”
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Reporting by Helen Murphy and Nelson Bocanegra; Editinb by W Simon