Colombia Lifts Rate to 5.75% as Inflation Nears 7-Year High

  • Economists see CPI closer to 4% target ceiling in two years
  • Policy makers have increased rates 125 basis points this year

Colombia’s central bank raised its policy rate for a fourth straight month as it seeks to curb spending growth and cool the fastest inflation in almost seven years.

The seven-member board voted to increase the policy a quarter percentage point to 5.75 percent, bank Governor Jose Dario Uribe told reporters in Bogota after Friday’s meeting. The decision, which was not unanimous, was forecast by 32 of 37 analysts surveyed by Bloomberg with two predicting a 50 basis-point increase and three forecasting no change.

Policy makers said that “greater-than-expected increases in food prices and additional weakening of the exchange rate, related in large part to the oil price drop, are putting new pressure on inflation,” according to the text of their statement. “At the same time, inflation expectations remain high and the risk of a deceleration of internal demand going over what would be consistent with the drop in national income, has moderated.”

The central bank is seeking to reduce demand growth and damp inflation expectations to reach its goal of getting inflation back down to 3 percent within the next two years. The economy grew at the fastest pace among major Latin economies in the third quarter, easing concern that the plunge in oil prices will cause too pronounced a slowdown.

Finance Minister Mauricio Cardenas, who chairs central bank board meetings, said the rate increase sends a clear signal of the bank’s commitment to hitting its inflation target.

“The statement is very clear that we are on a path of tightening monetary policy,” Cardenas said. “Let there be no doubt or ambiguity that we are raising interest rates precisely so that inflation goes down.”

Region, Expectations

Central banks in Peru and Chile have also raised rates in recent months after the depreciation in their currencies pushed up import costs and fueled inflation. Even as Colombia raises rates, inflation expectations have continued to deteriorate.

Annual inflation accelerated to 6.39 percent in November, exceeding for a fourth straight month all the forecasts of analysts surveyed by Bloomberg. The surge in inflation is being led by import prices, as the peso slumps, and by a severe drought that has caused food prices to rise. 

Core inflation, which excludes food prices, and inflation of “non-tradable” goods and are less affected by exchange rate moves, are also above target. Inflation will be still be at 3.8 percent, near the upper limit of the range, two years from now, according to the most recent central bank survey of economists. Colombia targets inflation of 3 percent, plus or minus one percentage point. 

The peso has fallen 31 percent over the last year, the most after the Argentine peso and the Brazilian real among major emerging market currencies, and on Monday touched a record low of 3377.85 per dollar.

The economy grew 3.2 percent in the third quarter from a year earlier, the national statistics agency said last week. That compares to 2.9 percent growth in Peru, 2.6 percent in Mexico and 2.2 percent in Chile, while Brazil’s economy endures its deepest contraction in a quarter century.

“Inflation expectations have been rising and rising, and that means the bank
has to also has to keep raising rates,” said Mario Castro, a strategist at Nomura Holdings Inc. in New York. “A further 75 basis points of increases would be prudent”

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