Colombia Follows Mexico With Rate Rise, Budget Cut, FX Plan

  • Central bank raises benchmark rate a quarter point to 6.25%
  • Colombia is third country in region to raise rates in February

Colombia became the second Latin American nation this week to raise interest rates, cut government spending and announce steps to shore up its currency as commodity prices tumble.

A majority of the seven-member board voted to increase the policy rate a quarter point to 6.25 percent, bank Governor Jose Dario Uribe told reporters in Bogota after the meeting. The decision was forecast by 26 of 33 economists surveyed by Bloomberg with the rest expecting a half-point rise.

Colombia is racing to buttress a currency that has tumbled 27 percent in the past 12 months, helping pushing inflation to more than double the target. To prevent another abrupt depreciation, the central bank lowered the trigger at which it will intervene in the foreign exchange market, while Finance Minister Mauricio Cardenas announced spending cuts to crimp the fiscal deficit and bolster investor confidence. The series of measures are similar to those taken Wednesday by Mexico. Peru also raised its key rate last week.

“Inflation is the bank’s main focus at the moment, above economic growth,” said Daniel Escobar, head of research at Global Securities in Colombia. “Inflation could reach 8.5 percent by mid-year.”

Consumer prices rose 7.45 percent in January from a year earlier, the most in seven years, and will probably still be above 5 percent at the end of the year, Uribe said. Colombia targets inflation of 3 percent, plus or minus one percentage point.

Inflationary Pressures

“Higher than expected increases in food prices and additional weakening of the exchange rate, related to a large extent to the fall in the oil price, continue to exert inflationary pressure,” Uribe said, reading the bank’s statement. “Inflation expectations remain high, and one can predict additional pass through of the peso devaluation to domestic prices.”

The bank will auction foreign exchange call options when peso weakens 3 percent or more from 20-day moving average, compared with a previous level of 5 percent, Uribe said. The government will cut 2016 spending by 6 trillion pesos, equivalent to 0.7 percent of gross domestic product, with the details to be announced Monday, Cardenas said.

The Colombian peso has weakened more against the dollar in the past 12 months than any other emerging market currency after Argentina and Brazil.

A minority of Colombia’s central bank board has argued for half-point increases at recent meetings. The central bank reiterated its 2016 growth forecast of 2.7 percent, the slowest pace since 2009, as consumer confidence falls to the lowest in more than a decade.

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