Colombia Lifts Key Rate to Curb Fastest Inflation Since 2008

  • February inflation almost double upper limit of target range
  • Policy makers raised the key rate for seventh straight month

Colombia’s central bank raised its benchmark interest rate for a seventh straight month as the inflation outlook continued to worsen and economic growth unexpectedly accelerated.

In a split decision, the seven-member board voted to lift the key rate by a quarter point to 6.5 percent, bank Governor Jose Dario Uribe told reporters after the meeting in Bogota. The decision was forecast by all 31 analysts surveyed by Bloomberg.

Policy makers have repeatedly said that tighter policy is needed to “anchor” inflation expectations around the 3 percent target, and that increasing the policy rate in quarter point increments gives them more flexibility to react to new developments. The inflation rate rose to 7.59 percent in February as dry weather caused by the El Nino weather phenomena pushed up food costs and the weaker peso raised import prices.

“Inflation expectations remain high and the risk of a slowdown in domestic demand that exceeds the deterioration in national income continues to be moderate,” the central bank said in a statement accompany today’s decision.

The bank reiterated its forecast that gross domestic product with increase 2.7 percent this year. The economy expanded 3.3 percent in the fourth quarter from a year earlier, exceeding analyst forecasts, as strong office and home building helped offset falling prices for Colombia’s oil and coal, while agriculture benefited from a weaker currency.

“The most important thing is that they’re leaving room for more interest rate hikes,” said Juan David Ballen, an analyst at Casa de Bolsa brokerage in Bogota. “They keep saying that inflation expectations remain high and that the risk of deceleration in internal demand remains moderate, and those two ideas allow you to foresee that the rate hike path will continue.”

Two-year inflation expectations rose to 3.5 percent last month, according to the central bank’s survey of economists, from 3.47 percent. Colombia targets inflation of 3 percent, plus or minus one percentage point. The peso has dropped 15 percent over the past year, the most in emerging markets after the Argentine peso and the South African rand.

Central bank co-director Juan Pablo Zarate said in an interview this month that inflation forecasts need to fall in line with the target for the bank to halt rate increases.

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