Colombia Raises Key Rate a Quarter Point to Seven-Year High

  • Central bank lifts policy rate for fifth consecutive month
  • Policy makers are concerned about the current account deficit

Colombia’s central bank raised its benchmark interest rate by a quarter point after inflation accelerated to the fastest pace since 2009 and falling exports widened the current account deficit.

The seven-member board increased the policy rate to 6 percent, the highest in seven years, bank Governor Jose Dario Uribe told reporters Friday after the meeting. The decision was forecast by 34 of 37 analysts surveyed by Bloomberg, with one predicting a half-point increase and two forecasting no change.

“The bank has been extremely clear about keeping to a path of interest-rate increases in the short term,” Juan David Ballen a fixed income strategist at Casa de Bolsa, said before the decision. “Inflation has accelerated in a more aggressive way than the bank has increased rates.” 

Policy makers have increased the key rate by 1.5 percentage points since September after inflation exceeded the target range and then soared to a six-year high at the end of December. The central bank will probably lift rates to at least 6.5 percent in the next two months, Ballen said. Consumer prices rose 6.77 percent last year as dry weather caused by the El Nino weather phenomenon pushed up food costs and the weaker peso pressured import prices.

According to the most recent central bank survey, analysts expect inflation to end 2016 at 4.57 percent, above the 2 percent to 4 percent target range for a second year.

Finance Minister Mauricio Cardenas has said the country also needs to curb spending after a slump in oil prices pushed the current account deficit to about 6.5 percent of gross domestic product last year. Uribe said in an interview earlier this month that the bank wants to raise interest rates enough to get inflation back to its 3 percent target, but without triggering an “over-adjustment” in spending.

While economic growth has slowed, GDP will expand about 2.8 percent this year, outperforming most of major Latin American economies, according analysts surveyed by Bloomberg. Peru will expand 3.5 percent, Chile 2.3 percent while Brazil will contract 2.5 percent, the analysts predict.

The Colombian peso dropped to record low this week touching 3424.28 per U.S. dollar. Over the past 12 months, the currency has fallen 27 percent the most in emerging markets after the Brazilian real, the Argentine peso and the South African rand.

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