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Low inflation enables Central Bank
to continue lowering interest rates to historical lows
In May, consumer prices rose 0.6%, which was on target with the Consensus.
The May figure raised the annual inflation rate to 5.8%, from 5.7% in
April, which still remains below the 6% inflation target set by the
Central Bank for this year. Key behind the continued low inflation rates
observed since the beginning of the year is the lack of a strong pick-up
in economic activity as high unemployment (17.7% in March) continues to
stifle a more meaningful rise in domestic demand. Additionally, the
currency has remained strong, depreciating just 0.1% against the US$ in
the first five months of the year in nominal terms. This strength has
helped limit the inflationary pass-through to the domestic economy
resulting from higher import prices. Participants expect the downward
trend in inflation to abate as the domestic economy begins to gain up
steam amid the more favourable global environment and lower interest rates.
Nevertheless, price pressures are anticipated to remain moderate with the
year-end inflation rate reaching 6.4%, which is 0.2 percentage points
below the March forecast. The current favourable inflationary environment
prompted the Central Bank to lower the benchmark DTF interest rate an
additional 74 basis points in May following the 80 basis point cut in
April. Currently at 8.8% (7 June), the DTF rate is now 269 basis points
below its year-end level in 2001.
Economic growth slows in first
quarter amid weak global demand
According to the National Statistical Department (DANE), gross domestic
product (GDP) growth slowed to 0.5% in the first quarter compared to the
same quarter last year. The first quarter figure was well below market
expectations, which expected a pickup from the 1.3% growth registered in
the fourth quarter. The dismal first quarter reading also represented the
lowest quarterly rate observed since the end of the 1999 recession. On a
quarterly basis the economy actually contracted 0.9%.
On a sectoral basis, the worst performing sectors were mining and
manufacturing where activity declined 4.9% and 3.7% respectively in the
first quarter over the same quarter last year. Healthy output in
construction and transport/communications of 3.5% and 3.7% respectively
helped avert a more substantial weakening in economic growth.
The government attributed the meagre first quarter growth to continued
guerrilla attacks on the country’s infrastructure - particularly the
energy sector – but also asserted that political uncertainty played a
role. In addition, the Colombian economy is likely to have suffered from
weak global demand, particularly from the United States. While the
government has yet to published aggregate demand and supply data, trade
data indicate that exports dropped 15.0% in the first quarter, compared to
the same quarter last year.
Participants have revised last month’s downward a notch for this year to
reflect the weak first quarter showing but additional downward revision
cannot be ruled out, given that some panellists’ figures do not include
the data release. Moreover, the government had indicated previously that
growth in the first quarter would reach 1.5-1.8%. Even so, the Consensus
figure is now well below the government’s forecast of 2.5% annual growth
for this year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Colombia. For more details please click here.
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