Colombia Holds Policy Rate at 4.5% as Peso Slumps to Record

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Colombia’s central bank kept borrowing costs unchanged for a 12th month as a worsening growth outlook prevented policy makers from acting to curb above-target inflation.

The seven-member board voted in a split decision to hold the benchmark rate at 4.5 percent, central bank Governor Jose Dario Uribe told reporters Friday in Bogota. The decision was forecast by 34 of 38 analysts surveyed by Bloomberg, with the others predicting a quarter percentage-point increase.

“Forecasts show temporary price shocks will revert and the probable excess capacity will contribute to inflation converging to target in an environment of anchored inflation expectations,” Uribe said. “Notwithstanding, the partial transfer of the peso’s devaluation to prices and an eventual intensification of El Nino can make the convergence slower.”

The central bank forecasts the slowest growth since 2009 this year on slumping oil prices and falling foreign investment, while it maintains the highest key rate among inflation-targeting countries in Latin America after Brazil.

“Growth is in a strong deceleration path so it would’ve been premature to make a move,” said Juan David Ballen, a strategist at Casa de Bolsa. “It all depends now on how inflation continues to behave.”

Cooling Demand

The central bank last month cut its forecast for 2015 economic growth to 2.8 percent, which would be the weakest since the aftermath of the global financial crisis, while consumer confidence unexpectedly crashed.

Colombia’s benchmark Colcap stock index has fallen 40 percent in dollar terms this year, the worst performer of more than 90 primary equity indexes tracked by Bloomberg.

Finance Minister Mauricio Cardenas said Friday that the impact of the weaker peso on prices is a one-off effect and he sees inflation slowing toward the 3 percent mid-point target next year.

Inflation accelerated to 4.46 percent in July, above the 2 percent to 4 percent target range for a sixth month. Inflation of tradable goods accelerated to 4.69 percent, the fastest pace since 2004. Tradables can be exported or substituted by imports and are more sensitive to movements in the exchange rate.

“We said on various occasions that from the second half of the year inflation would start to fall, fundamentally due to a fall in food prices. Our forecasting team now views this as unlikely,” Uribe said.

The central bank expects inflation to start slowing toward the 3 percent target in 2016, Uribe said.

The peso closed at a record 3,107.65 per dollar, after the price of crude, the nation’s biggest export, dropped by more than half over the past year. The currency’s 38 percent plunge in the past 12 months is the biggest in emerging markets after the Russian ruble.

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

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