Vallejo Says Colombia Seeks Cooler Demand Before Rate Rise Halt

  • Bank wants to see core inflation, current account gap falling
  • Growth is relatively strong given slump in oil prices

Colombia’s central bank wants to see cooler domestic demand growth and inflation before it halts a series of interest rate increases, as the economy proves stronger than forecast, according to a member of the bank’s policy committee.

“When monetary policy starts to show results in inflation expectations, in core inflation and in spending in relation to income, in internal demand, the bank can think about a slower rate increase path, or of stopping or pausing,” co-director Cesar Vallejo said in an interview Thursday in Bogota.

Vallejo and his colleagues on the bank’s board have raised borrowing costs at their last seven meetings, as inflation accelerated to its fastest pace since 2008. Even after this “pro-cyclical” tightening, and the shock from the slump in oil prices, there is no sign that the economy is cooling too much, Vallejo said.

“There don’t seem to be indicators that show an excess slowdown in demand, or that there will be one,” he said. “Rather the contrary, we are seeing that demand has a dynamism greater than one could expect given the reduction in national income.”

The economy’s potential growth rate, or the pace at which it can expand without generating inflationary pressure, is probably close to 2.7 percent, the bank’s forecast for this year’s gross domestic product growth, according to Vallejo.

A slowdown in demand is needed to curb the current account deficit, which widened to 6.5 percent of GDP last year, Vallejo said. The deficit is associated with “demand that remains very active compared to income,” and policy makers would like to see it fall to 3 percent or less, he added.

“A current account deficit is worrying when it’s higher than 3 percent of GDP,” Vallejo said. The need for the country to adjust spending to get the deficit under control “is much more urgent in a context in which financial markets are very nervous.”

Consumer prices rose 7.59 percent in February as a drought pushed up food costs and a drop in the peso increased import prices. Policy makers are concerned that the rise in inflation for temporary reasons may lead to an increase in “indexation”, or of businesses linking price rises automatically to the headline inflation rate, he said.

Consumer price inflation will slow to 3.5 percent in two years time, according to the bank’s most recent survey of economists, above the mid-point of the bank’s target. Colombia targets inflation of 3 percent, plus or minus one percentage point. The bank tries to “anchor” expected inflation close to the target, since this plays a role in price-setting decisions.

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