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Colombia Raises Key Rate to 4.25% as Growth Outpaces Peers

Colombia’s central bank raised its overnight lending rate for a fourth straight month as policy makers withdraw stimulus in Latin America’s fastest growing economy.

In a split decision, the seven-member board lifted the policy rate a quarter point to 4.25 percent, bank Governor Jose Dario Uribe told reporters today. The increase was forecast by 30 of 32 analysts surveyed by Bloomberg, with two expecting no change.

While Mexico, Chile and Peru have lowered borrowing costs as growth slows, Colombian policy makers in April began increasing the key rate after the economy expanded at its fastest pace in more than two years in the first quarter. The central bank today raised its 2014 growth forecast to 5 percent from 4.3 percent, Uribe said.

“Aggregate demand has maintained strong growth in the context of near full employment,” the central bank Governor said. “At the same time, inflation expectations are close, or slightly higher, than 3 percent.”

Gross domestic product rose 6.4 percent in the first quarter, led by a surge in public works spending and a recovery in the coal and coffee industries. Chile’s economy expanded 2.6 percent over the same period, while Peru’s grew 4.8 percent.

Above Potential

“Although some board members opposed the 25 basis point hike, the upwards revision in the growth forecast shows that the majority believe the economy is growing at or above potential and that they should continue to steadily withdraw monetary stimulus,” Francisco Rodriguez, an economist at Bank of America Corp., said in an e-mailed response to questions.

Colombian consumer prices rose 2.8 percent in June from a year earlier, the slowest pace among Latin America’s seven largest economies. The central bank targets inflation of 3 percent, plus or minus one percentage point.

Uribe said today he expects inflation will end the year close to 3 percent.

The most recent central bank survey shows analysts forecast the key rate will be raised to 4.5 percent by year end.

After unexpectedly starting its rate tightening cycle in April, the central bank will probably pause after today’s move, according to Nader Nazmi, a Latin America economist at BNP Paribas SA.

“The fact that the central bank started hiking early gives them more room to be gradual,” Nazmi, who also sees the rate ending at 4.5 percent this year, said by phone from New York before today’s decision.

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