May 6 (Bloomberg) -- Colombian Finance Minister Mauricio Cardenas said interest rates will probably rise further this year as the central bank fights to keep inflation expectations under control amid an economic rebound.
The bank’s seven-member board, which Cardenas chairs, unexpectedly raised its policy rate to 3.5 percent last month in a split decision. The increase was the first in more than two years.
“The economy needs less monetary stimulus relative to two years ago,” Cardenas said today in an interview in Paris. “We’re growing at a rate that is close to potential and we want to keep inflation expectations well anchored.”
The remarks underline economists’ forecasts that rate increases in Colombia have further to go amid unexpectedly strong employment, industrial output and consumer spending data in the first quarter. Cardenas said the discussion among policy makers was only about when, not whether to move.
“There was some debate about when to begin the normalizations of monetary policy but there was no discussion about the need to withdraw some of the stimulus,” he said at meetings being held by the Organization for Economic Cooperation and Development.
Annual inflation accelerated to 2.72 percent last month, its fastest pace since 2012, and higher than all 23 estimates in a Bloomberg survey. The central bank targets consumer price rises of 3 percent, plus or minus one percentage point.
The finance minister said the “neutral” level of interest rates, or the rate at which they neither boost nor restrict growth, has probably dropped over the past two years as capital inflows picked up, though he declined to say what that number is.
“With more capital flowing into Colombia, with greater potential GDP growth, it’s probably a rate that is somewhat below what the neutral rate was before we adopted this stimulus,” he said.
The capital flows have contributed to a 5.9 percent appreciation of the peso over the last month, the biggest gain among 24 emerging market currencies tracked by Bloomberg. Cardenas says the peso rally is an “over-reaction” to JPMorgan’s decision to increase the weighting of Colombia’s local peso bonds in its indexes.
“It’s an index that many investors use as a reference, not necessarily a straitjacket,” Cardenas said. “It indicates that there is more appetite for Colombia, but some analysts are inferring from this numbers that I don’t think are real in terms of the potential portfolio investments in Colombia.”
Cardenas predicted that Colombia’s strengthening economy will help it become the next nation to join the Paris-based OECD, currently a 34-member club of advanced economies.
The central bank will maintain its current pace of dollar purchases to keep the peso from rising until June and then decide on its next move, he added. At its March meeting, the bank said it would buy as much as $1 billion in the second quarter.
Industrial output rose 2.8 percent in February from a year earlier, its strongest growth in 10 months, while retail sales growth accelerated to a six-month high of 6.7 percent over the same period.
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