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Colombia's central bank drops benchmark rate, warns of 'excessive deceleration'

Colombia's central bank on March 24 cut its benchmark interest rate by 25 basis points to 7.0% as it pointed to a sharper-than-expected drop in inflation and some economic weakness.

In announcing the decision, Banco de la República noted that consumer annual inflation slowed for the seventh consecutive month in February, falling to 5.18%. Expectations for year-end 2017 and 2018, meanwhile, have shrunk to 4.49% and 3.6%, respectively. The central bank has a 3.0% inflation target for 2018.

"The reduction in inflation was higher than expected by the bank's technical staff and by the market average," it noted. "However, indexation mechanisms and the increase in the persistence of inflation may slow its convergence to 3.0%."

Additionally, some recent economic activity indicators have pointed to a weakening in the first quarter, which threatens the current growth forecast of 2.0%, with a range of 0.7% to 2.7%. "Should this trend be accentuated, the technical staff's growth forecast for 2017 could be reduced," the central bank warned.

The central bank also highlighted higher international uncertainty and "the risk of an excessive deceleration," in its decision, which was approved by four of six board directors. One of the outlying board member had voted for a larger 50-basis-point drop and the other voted to keep the benchmark rate stable.

"Recent indicators point at a greater risk of increases in the excess capacity of the economy, although uncertainty on its size is pronounced," the central bank said.