Colombia Lifts Key Rate to 4% and Doubles Dollar Purchases

Colombia’s central bank raised its benchmark interest rate for a third straight month as policy makers withdraw stimulus to South America’s fastest-growing economy. The bank also expanded its dollar purchase program.

The seven-member board lifted the policy rate a quarter point to 4 percent, bank Governor Jose Dario Uribe told reporters today. The decision had been forecast by 22 of 28 analysts surveyed by Bloomberg, with five forecasting a half-point increase, and another predicting no change.

“Economic growth in the first quarter was significantly higher than expected,” Uribe said, reading the board’s statement. “A gradual adjustment to the expansive monetary policy posture reduces the need for brusque changes in the future and ensures macroeconomic stability.”

The economy expanded 6.4 percent in the first quarter, its fastest pace in more than two years, even as growth slowed in Peru, Chile and Brazil. The central bank will raise its policy rate to 5.25 percent by the end of next year as the expansion takes the economy close to its full capacity, said Juana Tellez, chief economist BBVA Colombia.

“There are demand pressures, and this is why inflation has been gaining speed,” Tellez said in a phone interview after the policy meeting. “The central bank has to react to these pressures to prevent inflation from exceeding its target range.”

Dollar Purchases

First-quarter growth exceeded all 27 forecasts in a Bloomberg survey in which the median estimate was 5.2 percent. Growth was led by a surge in public works spending ahead of the presidential elections in May and June, and a recovery in the coal and coffee industries. Chile’s economy expanded 2.6 percent over the same period, while Brazil’s grew 1.9 percent.

Colombia’s central bank will buy as much as $2 billion between July and September, up from $1 billion in the second quarter, Uribe said. With the Treasury also buying dollars, the central bank and the Finance Ministry are aligned in seeking to correct exchange rate “disequilibrium,” Finance Minister Mauricio Cardenas said.

“With the dollar purchases by the central bank and the Treasury, we can participate very actively in this market and correct the revaluation that we see as something completely transitory,” Cardenas told reporters at the bank’s news conference. “It isn’t good for the country for the peso to be where it is today.”

The peso has jumped 5.9 percent in the past three months, the best performance among 24 emerging market currencies tracked by Bloomberg. It closed little changed today at 1,882.60 per dollar.

Faster Inflation

Annual inflation accelerated for a sixth straight month in May, reaching 2.9 percent, the fastest pace since 2012. Uribe said there is an increased probability that inflation ends the year above the midpoint of its 2 percent to 4 percent target range.

“The data we’ve seen in recent months have increased the chances that inflation ends the year a little above 3 percent,” Uribe said. “It’s very probable that we’ll have inflation above 3 percent, and very sure that it’ll be below 4 percent.”

Consumer prices will rise 3.4 percent this year, according to the most recent central bank survey of economists, up from the 2.9 percent forecast in a March survey.

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 4.7 percent last month, while Brazil’s increased to 6.4 percent.

President Juan Manuel Santos, who gained a second four-year term in elections this month, says the economy can grow permanently at “Asian” rates of growth if he succeeds in negotiating a peace deal with Marxist guerrillas.

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