The Colombian central bank slashed the main policy rate by 25 basis points in a surprise move noting consistent inflationary pressures and downside risks to growth.
The benchmark interest rate is now at 7.25%, its lowest since May 2016. The most recent change was a 25 basis points cut in December.
The bank said it considered the weakness of economic activity in the country and the risk of an excessive deceleration and uncertainty about the speed of convergence of inflation to its target.
"Considering the current level of core inflation indicators and inflation expectations, various calculations of the real policy interest rate are above its average since 2005," the central bank statement said.
As per the latest report, inflation rate in Colombia has decelerated for the sixth consecutive month in January to 5.47%, but the central bank noted that the average of core inflation indicators remained stable at 5.61%. The bank also considered upward pressure on bond yields.
"Analysts' inflation expectations to December 2017 increased, and continue above the range of 2.0% to 4.0%; those to two years and those embedded in public debt bonds to 2, 3, and 5 years remained stable, posting between 3.7% and 4.8%," the central bank said.
The apex bank in its statement mentioned the appreciation of the Colombian peso against the US dollar in the recent months. Upon the rate cut announcement, the currency slipped against the greenback.
USD/COP ended the day's trading at 2,890 compared to the previous close of 2,868, meaning a 0.76% decline in the peso. The peso, however, is still trading stronger on the month.
At Friday's close, the peso is 1% higher versus the greenback from its January close, adding to the 5.2% rally through December and January.
Inflation and growth
The central bank said the effects of the strong transitory supply shocks that diverted inflation from its target continue to fade, citing the slowdown of the food CPI in January.
Colombia has expanded 1.6% in the fourth quarter, slightly better than in the third quarter, and for the whole year it stood at 2.0%.
The central bank noted the sharp fall in the consumer confidence indicator for January and said that should that be reflected on household spending, the growth forecast for 2017 could be reduced.