April 27, 2018 / 8:07 PM / a month ago

UPDATE 1-Colombia central bank cuts key rate to 4.25 pct, as expected

(Adds detail on decision, comment)

BOGOTA, April 27 (Reuters) - Colombia’s central bank lowered its benchmark interest rate to 4.25 percent on Friday, as improved inflation gave policymakers room to bolster sluggish economic growth.

The seven-member board voted unanimously to reduce the lending rate by 25 basis points, meeting expectations of the majority of analysts in a Reuters survey last week.

The cut is the first since January, when policymakers ended an expansionary cycle that shaved 325 basis points off borrowing costs. The benchmark interest rate is now at its lowest since June 2014.

Many economists believe that even as the economy is beginning to pick up - from 1.8 percent expansion last year - the bank needs to provide more steam to push it back to its potential of between 3.3 percent and 3.5 percent.

“Economic activity indicators available so far this year suggest that the economy would have continued with low growth, but higher than the one registered in 2017,” the board said in a statement.

Given that, the bank maintained its economic growth estimate for 2018 at 2.7 percent. The preliminary estimate of the technical team for GDP growth in 2019 is 3.7 percent, the bank said.

In the Reuters poll, 17 of 20 analysts predicted the board would ease borrowing costs to 4.25 percent, while one predicted a 50-point cut and two said policymakers would hold the rate steady.

Twelve-month inflation was 3.14 percent in March, hovering just above the ideal mid-point of the bank’s 2 percent to 4 percent target range. Analysts predicted April’s annual inflation would drop below 3 percent for the first time since September 2014.

Bank Chief Juan Jose Echavarria, reading from the statement, said the board took into account the weakness of the economy and concern over how quickly the economy would recover. Even while inflation has improved, he said some “upward risks persist.”

“One of them is a rebound in the price of food that affects expectations and delays the convergence of inflation to 3 percent. Likewise, a stronger-than-expected depreciation of the currency that could be transferred to domestic prices. Again, the uncertainty about these factors is high,” the bank said.

Finance Minister Mauricio Cardenas, who represents the government on the board, said earlier this week he hoped for a cut of more than 25 basis points.

“The results in terms of inflation in recent months pose a favorable scenario... This offers the bank room to deepen its policy stance, without compromising the consolidation,” Bancolombia said in a report. (Reporting by Helen Murphy and Nelson Bocanegra; Editing by Dan Grebler)

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