July 26 (Bloomberg) -- Colombia’s neutral interest rate, which neither stimulates nor curbs growth, is probably lower than it was before the global financial crisis, central bank Governor Jose Dario Uribe said, as the bank pares back its expansive monetary policy to ease pressure on inflation.
The neutral level has fallen “in part because a component of the rate is associated with the international rate which has fallen,” Uribe said in an interview yesterday in Cartagena. He didn’t give an estimate for the neutral rate, calling it a “non-observable variable.”
The central bank’s seven-member board raised the policy rate a quarter point at each of its last three meetings, to 4 percent in June saying it is “gradually” removing monetary stimulus. Co-director Carlos Gustavo Cano said this month that borrowing costs may be nearing the so-called neutral level, while another policy maker, Juan Pablo Zarate, said July 18 that Colombia still needs to raise the overnight rate in order for it to reach a “reasonable” level.
Policy makers will increase the overnight lending rate a quarter point to 4.25 percent when they next meet July 31, according to 20 of 21 economists surveyed by Bloomberg. One expects no change. The most recent central bank survey shows analysts forecast the key rate will be raised to 5 percent by next February.
The Andean nation’s 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.
The central bank’s technical team will probably increase its 2014 economic growth forecast from the current 4.3 percent, Uribe said. The estimate probably will be similar to last year’s 4.7 percent, he said.
The output gap is near closing, if it hasn’t closed already, Uribe said, reiterating similar comments made by central bank co-director Cesar Vallejo this week.
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.
Uribe said he expects inflation will end this year very close to 3 percent.
Vallejo said in a July 22 interview that “a ‘convenient’ interest rate, which corresponds to a normalization of monetary policy, is between 4 percent and 5 percent.”
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