Central Bank Ignores President’s Plea, Lifts Colombia Rate

  • Colombia raises key rate to 7.75%, eleventh straight increase
  • Decision was in line with majority of forecasts by economists

Colombia’s central bank ignored a last minute plea by President Juan Manuel Santos and raised the benchmark interest rate for an 11th consecutive month as surging food prices pushed inflation to the fastest since 2000.

In a split decision, the seven-member board voted to raise the key rate a quarter-point to 7.75 percent, central bank Governor Jose Dario Uribe told reporters in Bogota after the meeting. The decision was forecast by 27 of 34 analysts surveyed by Bloomberg, while seven had predicted no change.

The bank repeated its pledge to get inflation back within its target range by the end of 2017, saying that consumer price rises will cool as farm output returns to normal following the “temporary shock” of a drought caused by the El Nino weather phenomenon. Today’s move probably brings to an end the monetary tightening phase that began last year,  said Munir Jalil, an economist at Citigroup Inc. in Bogota.

“This should be the last increase of the year,” Jalil said.“They’ll stay at these levels at least until the first months of 2017.”

Santos’ remarks, if anything, made it harder for policy makers to hold rates, since this would give the appearance that the independent bank was doing the government’s bidding, according to Jalil. Finance Minister Mauricio Cardenas, who chairs central bank board meetings, said he had also opposed the rate increase, and that “a group” within the board supported his and Santos’ position. Interest rates are already high enough to achieve the objective of getting inflation back to its target, he said.

Annual inflation accelerated to 8.6 percent in June, led by a 14.3 percent surge in food costs. Colombia targets inflation of 3 percent, plus or minus one percentage point. A truckers strike may push prices higher again in July, but the impact will be temporary, policy makers said in today’s statement.

Colombia’s “monetary policy response recognizes that the shocks that have affected prices are transitory, and looks to anchor inflation expectations in order to guarantee that inflation converges toward the target,” the central bankers said in their policy statement.

President Santos had “respectfully” asked policy makers not to raise rates, saying it would affect economic growth and job creation, according to an e-mailed statement from the presidency earlier today.

While ignoring his request, the central bank reduced its growth estimate this year to 2.3 percent from 2.5 percent, according to the statement. The government left its forecast unchanged at 3 percent.

The inflationary impact of the 40 percent weakening in the peso over the past two years is showing signs of fading. Prices of “tradable” goods rose 7.9 percent in June from a year earlier, virtually unchanged from the 7.88 percent increase in May. Tradables can be exported or substituted by imports and so are sensitive to movements in the exchange rate.

The strike by truckers in June and July will probably mean that July inflation will be bad, said Mario Castro, a strategist at Nomura Holdings Inc. Police and truckers clashed violently during the strike and food prices rose in major cities as unions blocked roads in the dispute over fuel prices, road tolls and plans to rid highways of older trucks.

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