Global Securities’s Daniel Escobar, the only analyst surveyed by Bloomberg to predict Colombia’s interest-rate increase yesterday, says policy makers will raise borrowing costs twice more by June to keep inflation in check.
Escobar correctly forecast that the central bank would raise the benchmark overnight target 25 basis points, or 0.25 percentage point, to 5 percent while the other 31 analysts in the survey predicted no change. The increase is the eighth since the beginning of last year as central bankers seek to cool the fastest economic growth in five years, even as their counterparts from Brazil to Indonesia trimmed interest rates to fend off the effects of Europe’s debt crisis.
“Colombia’s internal dynamics remain strong and the economy doesn’t need further stimulus,” Escobar said by telephone from Bogota. Policy makers will raise the rate to as high as 5.5 percent in the first half of 2012 and leave it there through year-end, he said.
President Juan Manuel Santos last month said it wouldn’t be “appropriate” for the bank to raise borrowing costs as other central banks cut. Colombia’s peso jumped as much as 1.1 percent, and bond yields rose today.
The surprise move follows a 25-basis-point increase in November, when the seven-member board, led by central bank chief Jose Dario Uribe, cited the need to bolster credibility amid rising inflation expectations. Policy makers kept the rate on hold in December.
Colombia’s rate increases are in contrast to cuts in emerging markets worldwide. Brazil, Chile, Russia, the Philippines, Israel, Romania, Moldova, and Mauritius all reduced benchmark lending rates within the past two months amid concern Europe’s debt crisis will derail global growth.
The rate differential, or spread, between peso bonds due July 2024 and June 2016 may fall as the unexpected move reduces inflation expectations, said Munir Jalil, the chief economist at Citigroup’s Colombia unit.
“This definitely took the market by surprise,” said Jalil in a phone interview from Bogota. “The central bank’s statement is very hawkish, the question now is how much farther they have to go.”
The peso advanced 0.4 percent to 1,810.40 per U.S. dollar, from 1,817.75 yesterday. Yields on the government’s peso bonds due May 2014 rose 11 basis points, or 0.11 percentage point, to 6.18 percent, according to data from the country’s stock exchange.
Signals the economy is slowing will allow Banco de la Republica to leave the benchmark rate at 5 percent through June before raising it to 5.5 percent at the end of 2012, according to Jalil.
Colombia’s retail sales rose 1.3 percent in November from the year-earlier period, lower than the 5.9 percent median estimate of 18 analysts surveyed by Bloomberg. Bank lending is also showing signs of slowing, Jalil said.
In their statement yesterday, policy makers cited rapidly-expanding credit and economic growth that reached 7.7 percent in the third quarter as the reasons for raising rates.
“The latest information suggests that in the fourth quarter, the Colombian economy continued to show strong momentum,” policy makers said in their statement. “Bank credit continued to show high rates of increases.”
The bank’s statement was “very plain” and didn’t give many details on how the decision was made during the meeting that lasted nearly eight hours, said Julian Marquez, analyst at Interbolsa SA in Bogota.
Third-quarter gross domestic product growth seemed to be what “triggered” the bank’s decision, he said.
Marquez said the bank didn’t give any indicators on its position toward future rate decisions.
Total lending rose to 213 trillion pesos ($117.2 billion) in November, up 22 percent from 174.3 trillion pesos in the same month a year earlier.
Uribe yesterday said the bank expects the economy expanded 5.5 percent to 6 percent in 2011 and will grow 4 percent to 6 percent in 2012. He said the rate increase seeks to stabilize growth.
At the same time, the bank also noted that inflation expectations have increased. Inflation ended 2011 at 3.73 percent, within the central bank’s target of 2 percent to 4 percent for 2011 and for 2012.
In a bid to ease gains in the currency, the central bank said Oct. 28 it will sell $200 million in dollar options whenever the peso’s 20-day moving average changes by more than 4 percent. No options have been auctioned since the announcement.
Speaking after the decision at the central bank in Bogota, Finance Minister Juan Carlos Echeverry said the government won’t bring any dollars into the country for financing in 2012, and will also keep at least $1 billion of Ecopetrol dividends offshore -- continuing a policy from last year -- in a bid to keep the peso’s appreciation in check.
Additionally, the government will also keep $1.2 billion of royalty funds offshore, Echeverry said, adding that the rate increase was intended to keep the economy on “cruise speed.”