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

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  • 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.

In a majority decision, 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.

Policy makers have now 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 bank will probably raise rates at least another 50 basis points as a slump in the peso puts pressure on import costs and consumer prices, according to Capital Economics Ltd. The bank also wants to limit the burgeoning current account deficit that may undermine the peso further.

“The latest drop in the peso is likely to keep inflation well above its 2-4 percent range and the current account deficit is a major concern,” Capital Economics said in a note to clients after the meeting. “With fiscal policy unlikely to tighten, monetary policy will have to do the heavy lifting to both re-anchor inflation and contain balance of payments risks.”

Finance Minister Mauricio Cardenas said the country 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.

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.

“To ensure the convergence of inflation toward the target in 2017, the board decided to maintain the path of 25 basis-point increases in the benchmark rate,” Uribe said today. “The magnitude of the peso’s depreciation and the impact of El Nino will slow the convergence toward the inflation target.”