Colombia Holds Key Rate at 4.5% as Central Bank Board Splits

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Colombia’s central bank voted by a majority to keep borrowing costs unchanged for an 11th month, while some board members argued for a quarter-point increase as a weaker peso stokes inflation.

The seven-member board held the benchmark rate at 4.5 percent, central bank Governor Jose Dario Uribe told reporters Friday in Bogota. The decision was forecast by all 31 analysts surveyed by Bloomberg. The previous decisions this year had all been unanimous.

“This is a big change in stance,” German Cristancho, head analyst at Corredores Davivienda said in a telephone interview from Bogota. “The central bank is sending a clear signal that inflation is a concern and that they are ready to lift rates if needed.”

Investors will likely start betting on higher interest rates even before year end, said Cristancho. The latest central bank survey showed a majority of analysts expected the next move to be a quarter-point cut in March.

Peso, Food

The peso has tumbled 35 percent against the dollar in the past 12 months, more than any other major emerging market currency after the Russian ruble. The central bank is now more skeptical that inflation will have an “important fall” in the second half of the year, Uribe said.

“Lower food supply, transmission of nominal peso deprecation to consumer prices and the increase in imported raw materials prices explain in large part the acceleration of inflation,” Uribe said, reading the bank’s policy statement.

Consumer prices will probably increase by about 4.5 percent this year, Uribe said. The bank also cut its forecast for 2015 economic growth to 2.8 percent from 3.2 percent.

Inflation, Growth

Inflation accelerated to 4.42 percent in June, above the 2 percent to 4 percent target range for a fifth month. Inflation of tradeable goods accelerated to 4.17 percent, the fastest pace since 2004. Tradeables can be exported or substituted by imports, and so are sensitive to movements in the exchange rate

Three measures of “core” inflation tracked by the central bank, which exclude the most volatile prices, rose to the highest level in six years.

Finance Minister Mauricio Cardenas said this week that the benefits of the weak peso outweigh the costs, as the government looks to revive an economy that grew at the slowest pace in six years in the first quarter.

Falling currencies have contributed to above-target inflation in other countries in the region, including Chile, Peru and Brazil.

Colombia’s peso weakened to its lowest level since 2003 on July 30 after the price of crude, the nation’s biggest export, dropped by more than half over the past year. The current account deficit last year widened to the most since 1997.

Gross domestic product will expand 3.2 percent, the fastest pace in the region after Peru, according the median forecast of 28 economists surveyed by Bloomberg. Chile and Mexico are expected to grow 2.6 percent, while Brazil is forecast to contract 1.5 percent.

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