Colombia Central Banker Says Rate Stance Isn't to Cool Growth

  • Jump in September's inflation caused by one-time effects
  • Board sees greater risk that inflation expectations increase

Colombia’s inflation is being driven higher by temporary supply shocks and not demand pressures and the economy doesn’t need action to cool already slowing growth, central bank co-director Cesar Vallejo said.

Last month’s quarter-point interest rate increase was aimed at controlling inflation expectations and won’t have a major impact on growth, Vallejo said in an interview Monday in Bogota. Even a half-point increase wouldn’t have had a very strong effect, he said.

“An increase of a quarter point won’t significantly add to the deceleration of the economy,” Vallejo said. “It reduces a little the stimulus that monetary policy is providing today, because the real interest rate remains very low.”

Consumer prices rose 5.35 percent in September, the fastest pace in more than six years, as dry weather hit food supplies and peso depreciation caused import prices to rise. Vallejo reiterated the bank’s view that these are one-time effects which will dissipate of their own accord, and slower demand growth will then cause inflation to slow back to its target.

Vallejo spoke before the September inflation report, then said in an email after it was published that the new data are in line with the bank’s view that price rises are being driven by temporary effects.

“With the passing of the effects of El Nino and of the devaluation, the impact of the deceleration in demand will make itself felt and inflation will begin to slow to its long-term target,” he said.

Three-month swap rates climbed 0.16 percentage point to 5 percent at 8:34 a.m. in Bogota, the highest level since July 2012, as the faster-than-expected price rises led traders increased bets on rate increases. 
 
Economists expect inflation at end 2016 at 3.6 percent, according to a central bank survey posted Sept. 16, up from 3.3 percent in the August survey. Vallejo said the bank’s board unanimously considers that inflation expectations remain “anchored” near the 3 percent target, but that the risks of them becoming unanchored have increased.

The peso has fallen 31 percent over the past 12 months against the dollar, the biggest drop among major emerging market currencies after the Russian ruble and the Brazilian real. Some pass-through from the the depreciation of the peso to inflation, is probably still to come, Vallejo said.

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