Colombia Unexpectedly Lifts Key Rate Amid Faster Inflation

  • Vote to increase benchmark rate to 4.75% was unanimous
  • Bank says new rate is consistent with 3% inflation target

Colombia’s central bank unexpectedly raised borrowing costs for the first time in more than a year as the decline in the peso pushed the inflation rate to its highest level since 2009.

The seven-member board voted unanimously to increase the benchmark rate 25 basis points to 4.75 percent, central bank Governor Jose Dario Uribe told reporters Friday in Bogota. The decision was forecast by 12 of 38 analysts surveyed by Bloomberg, with one expecting a half-point increase and the others predicting the rate would remain at 4.5 percent.

"The risk of a lasting increase in inflation and de-anchoring of inflation expectations has increased, while the risk of an excessive deceleration of economic activity hasn’t changed significantly," Uribe said. “This increase is coherent with inflation converging to the 3 percent target.”

Inflation accelerated to 4.74 percent last month, its fastest pace since 2009, as a weaker peso makes imports more expensive. The central bank has said the pass-through from the falling peso to prices and the weather phenomena known as El Nino could delay convergence of inflation to its target. Colombia targets inflation of 3 percent, plus or minus one percentage point.

The economy will expand 2.8 percent this year, according to the bank’s forecast, which would be the weakest since the aftermath of the 2008 global financial crisis, while still outpacing most of Colombia’s neighbors, according to analysts surveyed by Bloomberg.

The increase probably isn’t the start of an aggressive hiking cycle, according to Nicholas Spiro, a managing director at Spiro Sovereign Strategy.

“It’s clear that the central bank has been concerned about the severity of the depreciation of the peso and chose to act now in a pre-emptive fashion to avert a more aggressive tightening,” Spiro said from London. “This doesn’t feel like the start of a more pronounced rate hiking cycle for the simple reason there isn’t a need for one.”

The peso fell to a record low of 3,261.45 per dollar last month. The currency’s 35 percent drop in 12 months is the biggest after the Russian ruble and the Brazilian real among 31 major tenders. The rate decision came after the close of the currency market in Bogota.

Finance Minister Mauricio Cardenas, who is also president of the central bank’s board, announced the government cut its forecast for 2015 economic growth to 3.3 percent from 3.6 percent. Growth will accelerate to 3.5 percent in 2016, he said.

“This is a specific and concrete signal, so that there isn’t the slightest doubt about the central bank’s commitment to its inflation target,” he said.

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