Uribe Says April Rate Gain Gives Colombia Room for Gradual Moves

Colombia’s interest rate increase last month gives policy makers leeway to adjust borrowing costs in a gradual and prudent manner, bank Governor Jose Dario Uribe said.

The bank’s board unexpectedly voted 6-1 to raise its key rate a quarter percentage point to 3.5 percent in April, two months before most analysts had forecast. It was the first increase in more than two years.

“We are buying space to do it in a gradual way, without too many traumatic movements,” Uribe said in an interview today in Bogota. “All the information that we have shows that consumption and investment have good dynamics.”

Policy makers concluded that the economy needed less stimulus after economic data was “relatively good” in the first four months of the year, and consumer prices rose faster than the bank expected, Uribe said. Raising interest rates too late is more “costly” than increasing them too early, he said.

Colombia’s central bank hasn’t raised interest rates by more than a quarter point since 2003.

Policy makers cited “dynamic” internal demand and an uptick in inflation expectations in their decision to raise borrowing costs on April 25. Uribe will increase the policy rate another 0.75 percentage point to 4.25 percent by the end of the year, according to the majority estimate in the most recent central bank survey of economists.

Surprise Move

Last month’s rate increased surprised 26 out of 29 analysts surveyed by Bloomberg, who forecast the central bank would leave the rate at 3.25 percent. Some analysts may mistakenly have thought the central bank would be swayed by Colombian politics, and postpone its decision until after the May 25 presidential election, Uribe said.

The economy will grow 4.3 percent this year, the same pace as 2013, according to the bank’s forecast. Some members of the policy committee have a more optimistic outlook, Uribe said.

“The technical staff maintains a forecast of 4.3 percent, but some members of the board think it may be higher than that,” Uribe said. “With the information that I have now I assign a higher probably of being higher than 4.3 percent than lower than 4.3.”

The seven-member board has access to some information that the forecasting team doesn’t, partly through regular meetings with business leaders, Uribe said. Co-director Juan Pablo Zarate said May 9 that the economy may grow “much more” than 4.3 percent this year, while co-director Carlos Gustavo Cano last month predicted growth of 4.6 percent.

Inflation

Annual inflation accelerated to 2.72 percent last month, the fastest pace since 2012, and exceeding the median forecast in a Bloomberg survey for a third straight month.

Even after the recent pick-up, Colombia’s is the only major Latin American central bank that faces below-target inflation. Chile’s inflation rate rose to 4.3 last month, while Brazil’s increased to 6.3 percent.

Retail sales rose 6.7 percent in February from a year earlier, the fastest pace in six months, while industrial output grew 2.8 percent, the most since April last year.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE