Colombia Neutral Rate May Be a ‘Little’ Lower, Vallejo Says

Colombian central bank co-director Cesar Vallejo said that the neutral interest rate, at which monetary policy neither stimulates nor curbs growth, may have fallen.

“Dynamics in the Colombian economy could be causing the neutral interest rate to be a little lower, particularly the behavior of potential growth,” Vallejo said in a telephone interview yesterday.

The bank’s seven-member board raised the policy rate a quarter point at each of its last three meetings, to 4 percent, to curb inflationary pressure as the economy grew at the fastest pace in the region. Vallejo’s comments come after co-director Carlos Gustavo Cano said earlier this month that borrowing costs may be nearing the so-called neutral level while co-director Juan Pablo Zarate said last week that Colombia still needs to raise the overnight rate in order for it to reach a “reasonable” level.

Colombia’s growth in the second quarter was likely close to 5 percent, with gross domestic product probably expanding around 4.6 percent for the full year, Vallejo said.

“Internal demand continues to drive growth,” Vallejo said. “Investment in public works and construction remains dynamic. As long as internal demand continues at its pace backed by household demand and investment in public works, we can expect growth to end this year around 4.6 percent.”

‘Convenient’ Rate

The Andean economy expanded 6.4 percent in the first quarter, its fastest pace in more than two years, even as growth slowed in Peru, Chile and Brazil.

Policy makers will raise the rate another quarter percentage point to 4.25 percent this month, and to 5 percent by next February, according to the latest central bank survey of economists published July 11.

“A ‘convenient’ interest rate, which corresponds to a normalization of monetary policy, is between 4 percent and 5 percent” in nominal terms, Vallejo said.

Consumer prices rose 2.8 percent in June from a year earlier, the lowest among Latin America’s seven largest economies. Colombia targets inflation of 3 percent, plus or minus one percentage point.

Vallejo said he expects inflation to end 2014 at 3 percent or a “little” higher.

Colombia’s output gap is near to closing if it hasn’t closed already, he said.

“The economy’s behavior has surprised us all,” Vallejo said.

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