Colombian central bank hints at rate hike

By Money Times

Dec 14, 2015 08:22 PM EST

The Colombian Central Bank is heading towards a hike in interest rate. The Colombian government is keen on checking inflation rise and control the current account deficit.

The Colombia's economy growth rate outpaced all other Latin American economies during the third quarter. Despite reasonable credit offtake and encouraging job market, the demand is not contributing sufficiently to bridge the gap in current account deficit. The central bank's next meeting is scheduled on 18 December. 

The latest third quarter numbers on gross domestic product (GDP) of Colombia indicate that the risks of a sharp slowdown are receding. The Colombian economy grew 3.2 percent in the third quarter surpassing the remaining Latin American economies.

"This gives the central bank more leeway in setting interest rates," said Cesar Vallejo, co-director at the central bank. 

According to a report published by Bloomberg, two officials at Colombian central bank's policy committee hinted the possibility of interest rate hike to check inflation and reduce the current account deficit.

The Colombian economy is generating more revenues than expected in the wake of the drop in oil prices. If the central bank raises another quarter percentage points in the next meeting on 18 December, the interest rate will reach 5.75 percent. 

The Colombian central bank raised benchmark interest rate by an unexpected half-point on 30 October, as Reuters reports, to stem rising inflation. In the wake of economy slowdown, the inflation rate has been hovering over the bank's target range.

Contrary to the average forecast of analysts in a survey carried out by Reuters, the seven-member board hiked the interest rate to 5.25 percent. 

The decision was in the line of only one economists' forecast in the Reuters' survey while remaining predictions went against the decision of Colombian central bank.

The Colombian central bank had announced a call option auction to moderate exchange rate and it's been revised to 2015 GDP growth rate to three percent. 

The Colombian economy is witnessing reasonable credit offtake and encouraging job market. However, the demand is still not sufficient to contribute to bridge the gap in current account deficit. Central bank's board member Carlos Gustavo Cano favored continuous hike in interest rate as demand pressure is stoking inflation. 

On its meeting on 27 November, the central bank's board decided to hike reference interest rate by 25 basis points from 5.25 percent to 5.50 percent, as reported by Focus Economics.

The central bank's decision was below the forecast of economists, who predicted 0.50 percent rise. 

Vallejo said in an interview in Bogota, "a few months ago, some were worried that monetary policy could produce an excessive deceleration. The worry now, more than the economy's deceleration, is the current account deficit."

Gustavo Cano said: "The persistent increase in all the relevant annual inflation indicators is evidence of demand pressure. The path of additional rate adjustments must continue."

The consumer prices rose 6.4 percent in November recording the fastest growth rate in six years. The Colombian central bank's medium-term target is three percent. The Colombian central bank raised borrowing costs in the previous three meetings.

The current account deficit rose to 5.2 percent of GDP last year and is expected to further widen to 6.2 percent this year as forecast made by International Monetary Fund (IMF).

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