Colombia Analysts See Rate Rise as Inflation Outlook Worsens

  • Policy makers to raise the benchmark rate in October: survey
  • As recently as July, analysts had forecast a cut as next move

Colombia will raise borrowing costs for the first time in more than a year next month as the outlook for inflation deteriorates, according to analysts surveyed by the central bank.

Policy makers will raise the benchmark rate a quarter percentage point to 4.75 percent at their October meeting to curb the fastest inflation in six years, the survey found. As recently as July, analysts had forecast that policy makers’ next move would be a cut. The central bank has held the rate at 4.5 percent at its last 12 meetings.

Consumer prices increased 4.74 percent in August from a year earlier, the fastest pace since 2009, as the weakening peso caused import costs to surge and poor farming weather boosted food prices. Inflation will end 2016 at 3.6 percent, up from a previous forecast of 3.3 percent, according to the survey.

That conflicts with the view of central bank Governor Jose Dario Uribe, who told reporters in Medellin Tuesday that inflation will return to near its target next year as the economy slows and temporary price shocks fade. Colombia’s central bank board has split at its last two meetings, as a minority of policy makers argued that the rise in inflationary pressure merited a rate rise, even as growth slows amid lower prices for Colombia’s oil, coal, coffee and gold.

In a March interview, central bank co-director Juan Pablo Zarate said the central bank is giving increased weight to projected price rises as far ahead as two years, to see beyond temporary price swings caused by the “pass through” of a slump in the peso. Twenty-four month inflation expectations rose for a second straight month to 3.2 percent, from 3.1 percent in August, the survey found.

Policy makers try to keep expected price increases anchored close to the target, since these play a role in price-setting decisions and wage negotiations. Colombia targets inflation of 3 percent, plus or minus one percentage point.

Tradable goods inflation accelerated to 5.23 percent in August, the fastest pace in more than a decade. Tradables can be exported or substituted by imports and are sensitive to movements in the exchange rate.

The peso has weakened 34 percent over the last year, the worst performance after the Russian ruble and the Brazilian real among major emerging market currencies. The currency has stabilized in recent days as oil prices have stabilized, Uribe said. Growth is projected to slow to 2.8 percent this year, according to the central bank’s most recent estimate, its slowest pace in six years.