Single Colombia Rate Rise Is Enough to Curb Inflation, Cardenas

  • Policy makers would step in to smooth `extreme' FX volatility
  • Agriculture, tourism to gain most from peace with guerrillas

The Colombian central bank’s unexpected interest rate increase on Friday should be sufficient to anchor inflation expectations and does not indicate the start of tightening cycle, according to Finance Minister Mauricio Cardenas.

The decision to raise the benchmark lending rate by 25 basis points to 4.75 percent demonstrates the central bank’s dedication to the 3 percent inflation target, plus or minus one percentage point, he said.

“This sends a very strong clear signal to all economic agents that there’s a firm commitment on the part of the central bank to keep inflation under control,” Cardenas said in an interview at Bloomberg’s office in New York.

While the move follows the steady weakening of the peso this year, policy makers are not currently considering more aggressive measures to stem the currency’s decline, such as the use of swaps or international reserves, Cardenas said. The peso has reached its equilibrium level at about 3,000 per dollar, he added.

‘Pragmatic approach’

The Central Bank would still act in the case of “extreme volatility” in currency markets, Cardenas said, noting that the country’s floating exchange regime has helped Colombia absorb the impact of a sharp decline in oil prices. Allowing the peso to weaken is part of Colombia’s “balanced” policies, he said.

“More taxes, less expenses and a flexible exchange rate that allows our current account to adjust -- that’s the pragmatic approach,” Cardenas said.

The peso fell to a record low of 3,261.45 per dollar last month. The currency’s 35 percent drop in 12 months is the biggest after the Russian ruble and the Brazilian real among major emerging market currencies. It closed at 3,073.83 per dollar on Friday.

Peace Dividend

In industries such as processed foods, textiles and beverages, Colombian companies have already started to benefit as they face less competition with more expensive imported goods, Cardenas said.

Meanwhile, other sectors, including agriculture and tourism, stand to gain from the so-called peace dividend as Colombia is expected to sign a definitive pact with armed FARC rebels in six months, Cardenas said. Some parts of the country could see as much as 4 percent growth in economic activity with the end of the 50-year old conflict, he said.

Cardenas said multilateral organizations such as the World Bank may contribute to the costs of peace-transition projects that help preserve the environment and fight drug trafficking. The government is working on an estimate of the cost for the reintegration of former guerrilla fighters and crop substitution programs following a peace deal, he said.

“Part of the costs will be offset by additional economic growth," he said. "A portion of the peace process pays for itself."

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