Colombia Lifts Key Rate Most Since 2003 as Inflation Surges

  • Bigger-than-expected increase comes with CPI at six-year high
  • Plans announced to sell call options to limit FX volatility

Colombia’s central bank increased its benchmark policy rate by the most in more than a decade to curb the fastest consumer price increases since 2009.

The seven-member board voted to increase the benchmark rate 50 basis points to 5.25 percent, central bank Governor Jose Dario Uribe told reporters Friday in Bogota. The decision was forecast by one of 36 analysts surveyed by Bloomberg, with one expecting no change and 34 predicting a 25 basis-point increase. The decision wasn’t unanimous.

Inflation accelerated to 5.35 percent last month, its fastest pace in more than six years, as poor farming weather caused a spike in food prices and peso depreciation continues to push import prices higher. Peru raised interest rates in September, and Chile this month, also to curb above-target inflation.

“Inflation expectations have risen, and the risk of a deceleration in internal demand, beyond that which is coherent with the fall in national income, has moderated,” Uribe said, reading the policy statement.

Uribe also announced that the bank would auction $500 million worth of call options when the exchange rate is 7 percent or more weaker than the 20-day moving average. The measure aims to prevent “unjustified” movements in the exchange rate, which can boost inflation expectations, and give liquidity to the market, he said.

The peso’s 29 percent drop in 12 months is the biggest after the Russian ruble and the Brazilian real among 31 major currencies tracked by Bloomberg worldwide . The rate decision came after the close of the currency market in Bogota. In trading on Friday, the peso strengthened 0.7 percent to 2896.60 per dollar in Bogota.

The bank also raised its 2015 economic growth forecast to 3 percent from 2.8 percent previously, with a forecast range of 2.4 percent to 3.4 percent.

Economist forecasts of expected inflation over the next two years, a measure closely monitored by the central bank, rose for a third straight month in October, to 3.35 percent. Policy makers have repeatedly stressed the need to keep inflation expectations “anchored” close to the target, since these play a role in price-setting decisions and wage negotiations.

Inflation of “tradable” goods accelerated to 5.9 percent, the highest in more than a decade. Tradables can be exported or substituted by imports and so are sensitive to movements in the exchange rate. Colombia targets inflation of 3 percent, plus or minus one percentage point.

Retail sales, consumer confidence and industrial output reports published since the September policy meeting were all stronger than forecast. Finance Minister Mauricio Cardenas said Wednesday that recent data are in line with the government’s forecast of 3.3 percent growth forecast for 2015. That would be the slowest since 2009, while still outpacing most of Colombia’s neighbors, according to analysts surveyed by Bloomberg.

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