Colombia Lifts Key Rate to 4.5% as GDP Seen at Full Capacity

Colombia’s central bank raised its benchmark interest rate for a fifth straight month, saying the increase would keep the economy growing at a sustainable pace and inflation on target.

The seven-member board lifted the policy rate a quarter point to 4.5 percent, Governor Jose Dario Uribe told reporters in Bogota today. The decision, which was not unanimous, was forecast by 29 of 34 analysts surveyed by Bloomberg, with five expecting no change.

“The board believes that this will permit us to keep inflation and inflation expectations close to target, and the economy growing without excess or shortfalls of productive capacity,” Uribe said after announcing the rate decision.

While Mexico, Chile and Peru have lowered borrowing costs as their economies slow, Colombia’s central bank started tightening in April after gross domestic product expanded at its fastest pace in more than two years in the first quarter. With today’s move, Colombia is close to the end of the tightening cycle, said Camilo Perez, chief economist at Banco de Bogota.

“They are signaling that we are getting close to the end,” Perez said in a phone interview. “We are approaching the ceiling.”

Perez, the economist with the best track record of forecasting Colombia rate moves in Bloomberg surveys, said policy makers will increase the key rate another quarter percentage point at its September meeting.

GDP Forecast

Gross domestic product expanded 6.4 percent in the first quarter from last year, while Peru’s grew 1.7 percent in the second quarter, Chile’s 1.9 percent and Mexico’s 1.6 percent. Colombia’s national statistics agency is scheduled to publish second-quarter GDP data next month.

Today’s rate increase will allow Colombia to grow at a sustainable pace without overheating, said Finance Minister Mauricio Cardenas, who chairs the policy meetings.

“With this increase in the interest rate, we expect to achieve two objectives: inflation at 3 percent, and sustainable growth, at its potential rhythm,” Cardenas said.

The central bank surprised analysts by raising borrowing costs a quarter point to 3.5 percent in their April meeting, with Uribe telling reporters the institution’s “main task” was to defend its credibility. Policy makers since then have increased borrowing costs by a quarter-point in every meeting.

Inflation has accelerated since tightening started, reaching 2.89 percent last month as food prices surged. The central bank targets consumer price increases of 3 percent, plus or minus one percentage point.

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