The plunge in Colombia’s peso to a 12-year low poses a threat to the central bank’s objective of keeping inflation expectations close to their 3 percent target, bank Governor Jose Dario Uribe said.
The weaker currency carries a risk of “de-anchoring inflation expectations of more than one year, or contaminating in a persistent manner core inflation indicators,” Uribe said in Bogota, during the presentation of the bank’s quarterly inflation report.
Policy makers held the benchmark interest rate at 4.5 percent on Friday, with some members of the policy committee voting for the first time this year to increase borrowing costs. That triggered the biggest rise in swap rates Monday since 2012 as traders boosted bets on interest rate increases.
The central bank had repeatedly signaled that the “pass through” from a weaker currency to inflation is low and temporary. The bank’s recent comments represent “a change of language”, said Angela Gonzalez, an analyst at Banco de Bogota, in a phone interview.
“Inflation expectations remain anchored, but given such a large fall in the peso it’s possible that they’ll be affected,” Gonzalez said. “They’re thinking that the temporary shock could be more persistent than they expected.”
The currency Monday weakened to 2,917.95 per U.S. dollar, its weakest level since 2003 and down 36 percent from the year earlier. Over that period, only the currencies of Ukraine and Russia have declined more among more than 150 tracked by Bloomberg.
The pick-up in inflation has also been caused by food-price rises, as well as the weaker peso -- both temporary factors -- Uribe said. Consumer prices will rise by about 4.5 percent this year, and by about 3 percent in 2016, he said.
“Until now, the inflation expectations that are relevant for monetary policy decisions are expectations of 2, 3 and 5 years, which have remained practically constant and very close to 3 percent,” Uribe told reporters in Bogota after the presentation.
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
The acceleration in “core” inflation over the past nine months is partly due to the weaker currency, Uribe said. These indicators still aren’t showing signs of stabilizing, he said.
One-year swap rates climbed 20 basis points, or 0.20 percentage point, to 4.78 percent at 2:15 p.m. in Bogota on Monday.
The central bank last week cut its 2015 economic growth forecast to 2.8 percent from 3.2 percent. This is mainly due to lower-than-expected export growth, public spending and investment in buildings, Uribe said.
Colombia is seeing a change in the trend in real estate prices, especially in cities where prices had been rising fastest, Uribe said. Levels of mortgage credit remain relatively low, he added.