Inflation remains contained but target to be exceeded.  In August, consumer prices increased 0.26% in August, which was up from 0.10% in the prior month.  Nevertheless, the annual inflation rate dropped further to reach 8.0%, which is now in line with the Central Bank’s inflation target for this year.  So far this year, inflation has remained well below the quarterly targets set with the International Monetary Fund (IMF).  Inflationary expectations continue to improve as evidenced by a further 0.2 percentage point drop in the expected inflation rate for this year.  Nevertheless, participants expect some pressures towards the end of the year to cause prices to rise.  As a result, monetary authorities are expected to overshoot the inflation target for this year. 

Government objects to high interest rates.  The Pastrana administration complains that bank loan rates do not currently reflect the improved interest rate environment and that the current 1,057 basis point spread between deposits and consumer loans does not reflect the actual cost in financial intermediation that banks incur.  The government argues that the resulting higher cost of borrowing continues to stifle a more pronounced economic recovery.  The benchmark DTF interest rate has declined gradually this year from 13.5% in January to 12.3% in August but consumer loan rates remain at 22.8%.  The government has threatened banks that if rates do not decline the authorities will stop providing loan guarantees through the National Guarantees Fund (FNG).  The National Banking Association (ASOBANCARIA) counters that fees reflect elevated operating costs, imposed by reserve requirements and fee payments to government regulatory authorities.  The current hesitance by banks to ease credit conditions may in part reflect elevated costs but can also be explained by ongoing insecurity about the current trajectory of the economy.

Export engine slowing.  Export growth is showing clear signs of a marked slowdown.  In June, exports declined 18.1% over the same month last year, following a 5.8% drop in May.  The principal cause behind the downturn was a strong 39.8% contraction in traditional exports, particularly coffee and oil.  Coffee continues to suffer from historically low coffee prices, while the oil sector has been plagued by guerrilla attacks against the country’s biggest pipeline, which has been forced to shut down on numerous occasions this year.  Non-traditional export growth of 6.1% protected the external accounts from even further deterioration, particularly flower exports (+25.2%) as well as paper and related manufactured items (+40.2%).  On the other hand, imports continued to grow at a healthy rate of 9.8% in June over the same month last year.  As a result, the annual trade balance surplus narrowed further from US$ 787 million in May to US$ 630 million in June.  Consensus participants expect the trade balance surplus to widen somewhat. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Colombia.  For more details please click here.

For five-year forecasts, please click here.