Honduras cuts rate 3rd time, sees larger economic slump
The Central Bank of Honduras (BCH) cut its policy rate by another 75 basis points to 3.75 percent and has now cut it 175 points this year following cuts in February and March.
This rate cut should encourage a reduction in the cost of financing and thus stimulate demand for credit and encourage a resurgence of investment and consumption, the bank said in a statement on July 31.
Since December 2019, when BCH began easing, the rate has been cut 200 basis points.
The bank's board said it would continue to evaluate the impact on the economy from the COVID-19 pandemic so it could take appropriate measures in a timely manner to mitigate the effects on the country's economy.
A review of the economy and an update of forecast shows a higher-than-expected contraction of the economy in the second quarter due to the combination of shocks to both supply and demand, necessitating additional monetary measures, the bank said.
BCH lowered its estimate of economic contraction this year to 7.0 to 8.0 percent from a May forecast of a shrinkage of 2.9 to 3.9 percent.
In the first quarter of this year Honduras' gross domestic product shrank 1.2 percent year-on-year and by 2.6 percent from the fourth quarter of 2019. In the full year of 2019 the economy grew 2.7 percent.
"Even with a gradual opening of the national economy, the depth of the loss recorded to date allows us to anticipate that there will be a fall of annual gross domestic product in 2020 higher than expected in May, but then anticipating a recovery for 2021," BCH said.
GDP is forecast to expand 4.5 to 5.5 percent in 2021, up from the May forecast of 4.0 to 4.5 percent.
In addition to lowering its policy rate, BCH also cut the interest rate on its permanent credit facility by 75 basis points to 4.25 percent and the rate on direct reporting operations to 4.75 percent.
BCH raised its estimate for an increase in credit to the private sector in 2020 to 6.8 percent from an earlier 4.5 percent, which should help cushion the fall in disposable income and cash flow, and raised the estimate for total deposits in the banking system to 9.1 percent from an earlier 4.2 percent due to greater savings by households for precautionary reasons.
Despite the negative economic scenario this year, the central bank expects the country's external position to strengthen as a partial improvement in the U.S. labour market will boost remittances more than expected.
In addition, external financing to mitigate the effects of Covid-19 would lead to a larger-than-expected accumulation of reserves to a level that exceeds six months of imports, BCH said.
In June the International Monetary Fund (IMF) released some US$233 million to help Honduras meet urgent balance of payments and financing needs after the country in late March drew down US$143 million from its available IMF resources.
Inflation in Honduras, which rose to 2.65 percent in June from 2.29 percent in May, is expected to remain close to the lower limit of the central bank's tolerance range of 4.0 percent, plus/minus 1 percentage point, in 2020 and 2021.
Honduras' lempira has appreciated since late May against the U.S. dollar and was trading at 24.7 against the dollar on Friday, largely unchanged on the year, after declining in March and April.