Colombia in 2017: positive prospects for the inflation decrease
As stated by the Administrative Department of Statistics (DANE), Colombia closed 2016 with an inflation of 5.75% where health expenses was the category that pressured the most by having a variation of 8.14%. Even though the Bank of the Republic was not able to meet its target for the second consecutive year, the data is quite positive because it is a point less than in 2015 and with the cut in prices it opens the expectancy that the inflation will return to its course in 2017.
Meanwhile, the minimum wage for 2017 was readjusted by 7% which means household purchasing power would have increased by at least 1.25% in real terms in 2016.
Although the data released by the DANE is good news, it should not be ignored that there is a great challenge to continue lowering the inflation and bringing it to the 3%, a punctual goal of the Bank of the Republic. There is still concern about the effects of the tax reform, in particular, the VAT increase from 16% to 19%. Against this, the new manager of the Bank of the Republic, Juan José Echavarría, believes that inflation will be in the target range at the end of 2017. “The VAT increase will have a transitory effect, just once, since there will be no new increases of VAT in the coming years. Of course, the transitory effects on inflation are varied and complex. The careful study is a major challenge for the Bank”.
According to the Ministry of finance, the increase in VAT could affect inflation just once and only in about 0.56% points. The government also expects the Consumer Price Index (CPI) to change by 4% this year.
For Anif research center, after foreseeing the tax shocks for this year, the Bank of the Republic will have less slack to act because the margin of the rates has narrowed from 225 basis points to only about 100 before the approval of the treasury. Definitely, the Directors board will think about it before reducing rates again in the first half of 2017.
This is what the Minister of Finance commented about inflation data and the downward path that began in August 2017: “This will help the dynamism of domestic demand as the production of the economy is approaching to its potential level by improving the conditions for the generation of employment”. This will make it possible to reduce interest rates.
The fact is that keeping inflation under control is essential to any economy. A reality recognized by outstanding economists is that countries with high inflation rates are seen as non-viable. Price stability is a very valuable achievement because, among other things, it facilitates long-term contracts in companies which allows investment plans. If prices remain low and stable there will be less uncertainty to make decisions.
Colombians were accustomed to low inflation rates. The long years of high inflation left the country with many ills: interest rates rose, investment and credit tended to be short-term, wage negotiations were difficult, speculation was a widespread practice, and income and savings crumbled as inflation grew.
Concluding, the important thing now is that economic agents keep inflation rates low ,so the Bank of the Republic can be calm when making decisions.
(Excerpts from Revista Semana, January, 2017).
