Colombian Central Bankers Signal Interest Rates May Climb Higher

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Two members of the Colombian central bank’s policy committee signaled that higher interest rates may be needed to curb inflation and narrow a current account deficit.

Colombia’s third-quarter gross domestic product report, published yesterday, is more evidence that the risks of a sharp slowdown have receded, giving the central bank more leeway in setting interest rates, co-director Cesar Vallejo said.

“A few months ago, some were worried that monetary policy could produce an excessive deceleration,” Vallejo said in an interview in Bogota. “The worry now, more than the economy’s deceleration, is the current account deficit.”

The economy expanded 3.2 percent in the third quarter from a year earlier, outpacing all other major Latin American economies, as strong consumer demand helped offset a decline in oil and mining. The economy is growing faster than would have been expected given the fall in oil prices, Vallejo said.

With credit growing at an “important” pace, and a still-robust jobs market, demand isn’t “contributing sufficiently” to narrowing the current account gap, he said.

In a presentation published Friday on the central bank’s website, central bank board member Carlos Gustavo Cano said that Colombia should continue to increase interest rates as demand pressures stoke inflation, according to a member of the central bank’s policy committee.

“The persistent increase in all the relevant annual inflation indicators,” is evidence of demand pressure, co-director Carlos Gustavo Cano said. “The path of additional rate adjustments must continue.”

‘Unanchored’ Expectations

Medium-term inflation expectations have become “unanchored” from the central bank’s target of 3 percent, Cano said.

Consumer prices increased 6.4 percent in November from a year earlier, the fastest pace in more than six years. A slump in the peso has boosted import costs and a severe drought caused food prices to jump. The peso is currently close to its equilibrium rate, Cano said.

The bank will raise the policy rate another quarter percentage point, to 5.75 percent, at their Dec. 18 meeting, according to the median forecast in a Bloomberg survey of analysts. The bank increased borrowing costs at its last three meetings.

The current account gap widened to 5.2 percent of gross domestic product last year, according to the International Monetary Fund. It’s forecast to expand to 6.2 percent this year, the most since at least 1980, according to IMF estimates.

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