July 18 (Bloomberg) -- Colombia still needs to raise its benchmark interest rate to reach a “reasonable” level after raising it for the third straight month, bank co-director Juan Pablo Zarate said.
“We still haven’t reached a reasonable level in the interest rate, for equilibrium in real terms for the long term,” Zarate said in a telephone interview. “The interest rate we started with before the hiking cycle was so low, in real terms, that we can rest easy with the decisions we’ve made.”
While Zarate doesn’t think the overnight rate is currently at an equilibrium level, fellow co-director Carlos Gustavo Cano in a July 11 interview said that borrowing costs might be nearing a “neutral” level at which monetary policy neither stimulates nor curbs growth. Last month, the seven-member board unanimously voted to lift the policy rate a quarter point to 4 percent. The economy expanded 6.4 percent in the first quarter, its fastest pace in more than two years.
Growth in the second quarter shows a very good dynamic that’s “very similar” to the first three months of the year, Zarate said. Second-quarter gross domestic product growth may be a little lower, he said, citing seasonality and positives shocks that came together in the first quarter.
“There are some sectors that have been dynamic for a long time and remain dynamic such as retail sales and construction where I don’t see a changing trend, and there are others that had been negative but have turned around as in the case of industry,” Zarate said.
The probability of the output gap having closed “isn’t zero, like it was a year ago,” he said. “Recently growth has been above potential GDP growth, so the gap must be closing and at a stronger pace than we thought.”
Colombia’s economy may expand more than 4.5 percent this year, Zarate said.
“So far, the main driver of the economy has been internal demand, and there are signs of that continuing,” he said.
At the same time, domestic demand hasn’t fueled inflation, which Zarate said will end the year close to 3 percent. The central bank targets an annual inflation rate of 3 percent plus or minus one percentage point.
Among Latin America’s seven largest economies, Colombia has the lowest annual inflation rate of 2.79 percent.
“For now, the baseline scenario does not foresee a major shock by El Nino, by year end,” Zarate said.
Colombia’s central bank will raise the overnight rate by a quarter point to 4.25 percent by Sept. 30 and then increase borrowing costs to 4.50 percent by year-end, according to economists surveyed by Bloomberg.