Colombia Cools Rate Rise Pace Warning of Risk to Jobs, GDP

  • Median forecast in survey was for a 50 basis-points increase
  • Inflation expectations have consistently risen since August

Colombia’s central bank slowed the pace of interest rate increases citing the risk that sharp rises in borrowing costs could have a high cost in terms of lost jobs and output.

A majority of the seven-member board voted to increase the policy rate a quarter point to 5.50 percent, bank Governor Jose Dario Uribe told reporters Friday in Bogota. The decision was forecast by 15 of 40 analysts surveyed by Bloomberg, with 23 predicting a half-point increase and two expecting no changes.

Inflation accelerated to 5.89 percent in October as El Nino weather phenomena increased the cost of food and the weaker peso pushed up import prices. The increase led analysts to forecast that inflation would remain above the 2 percent to 4 percent target range through to at least the end of next year, according to the latest poll by the central bank. Still, the bank said today that two years was an appropriate period to get inflation back on target.

“Faced with the temporary shocks, an attempt to bring inflation back to the target quickly would produce excessive changes in interest rates and a high cost in terms of employment and economic activity,” Uribe said after announcing the bank’s decision. “An excessively slow response would also have costs.”

Colombia’s economy is forecast to grow 3 percent this year, the slowest pace since 2009, while exceeding growth among other major Latin American economies, according to economists surveyed by Bloomberg.

Today’s decision “is a bit of a surprise,” Juan David Ballen, a strategist at Casa de Bolsa, the brokerage firm of Colombia’s biggest banking group, said by message. “Keeping in mind inflation projections, we could get one or two more 25 basis-point hikes.”

The central bank said today that third quarter figures suggested “domestic demand was more dynamic than forecast.”

Colombian peso has weakened 23 percent in the past year, the most in Emerging Markets after the Brazilian real, amid the drop of oil, coal, gold and coffee prices.

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