Colombia cut interest rates to a record low on Monday amid the deepest slump in the nation’s history, extending the monetary easing that began when the pandemic hit.
The central bank reduced its key rate by a quarter percentage point to 2% in a unanimous decision. Analysts surveyed by the bank predicted the move, and forecast that it would be the last in the series of monthly cuts that began in March.
The economy contracted 15.7% in the second quarter from a year earlier as lockdowns and travel restrictions bankrupted thousands of business from restaurants, hotels and hair salons to the national airline Avianca. But with monetary policy already providing significant stimulus, most economists predict that policy makers will now pause as they gauge the strength of the recovery as businesses re-open.
The space for more rate cuts “has been narrowing, definitely”, central bank Governor Juan Jose Echavarria said at a press conference after the meeting.
“I believe we are getting to a point where in each board meeting we are going to look at the facts, at what the economic data say, and take a decision,” Echavarria said.
The central bank forecasts a contraction of between 6% and 10% this year, which would be the deepest on record.
Jobless figures published Monday pointed to a much weaker recovery than expected in Colombia’s labor market. Urban unemployment fell to 24.7% in July, from 24.9% in June. Analysts surveyed by Bloomberg had forecast a much bigger drop, to 23.9%.
The government will lift the nationwide lockdown starting Sept. 1, in a bid to prevent further economic devastation and job destruction.
The slump in demand also caused inflation to slow below the lower bound of its target range last month for the first time since 2013, to 1.97%. The central bank targets inflation of 3%, plus or minus one percentage point.
Latin American economies have been among the worst hit by the coronavirus pandemic, and some of Colombia’s neighbors have fared even worse. Peru’s economy slumped 30% in the second quarter, as one of the region’s strictest lockdowns brought much of the economy to a virtual standstill.
(Updates with quote from bank governor in fourth paragraph)