Colombia Defies Regional Trend, Holds Key Rate at Record Low

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Colombia held interest rates at a record low on Monday in the expectation that the biggest inflation spike in two decades will be temporary.

The central bank kept its key rate at 1.75% in a unanimous decision, governor Leonardo Villar told reporters after the bank’s June board meeting. The decision, which was in line with expectations, came as other Latin American economies tighten monetary policy or signal they’re about to do so.

Colombia Defies Regional Trend, Holds Key Rate at Record Low

Annual inflation accelerated at its fastest pace since 1998 last month as highway blockades by anti-government protesters disrupted supply. The unrest was initially triggered in April by an attempt to raise taxes, but morphed into a series of protests against unemployment, poverty, corruption and other grievances.

In explaining the bank’s decision, Villar said that inflation expectations remain anchored, while the jump in prices looks temporary. Core inflation, which excludes volatile food and energy costs, was in line with expectations, he said.

Colombia’s circumstances are different from those in emerging markets such as Brazil and Russia which are raising rates, and where inflation is above target, Villar said.

“In some of those countries inflation has clearly accelerated significantly, and compromised their inflation targets. That isn’t the case in Colombia,” he said.

GDP Forecast

Despite the damage done by the protests, and a third wave of Covid-19 infections, the bank boosted its forecast for economic growth this year to 6.5% from 6%, citing the economy’s strong performance in April. Even so, levels of unemployment and informality remain “particularly high”, the bank said.

The annual inflation rate rose to 3.3% last month, led by a surge in food prices, from 1.95% in April. The central bank will start raising borrowing costs in October, according to analysts surveyed by the bank.

Inflation will accelerate further this month, to 3.73%, according to economists surveyed by Bloomberg, which would be the highest rate in 15 months.

Vaccination Drive

Colombia has so far fully vaccinated 11% of its population, a lower proportion than in Chile, Mexico and Brazil. The country is currently suffering more than 600 deaths per day from a third wave of Covid-19 infections.

Elsewhere in the region, Mexico’s central bank unexpectedly lifted interest rates last week while Brazil’s left the door open to more aggressive monetary tightening in August after three consecutive increases of 75 basis points to its key rate. Chilean policy makers also discussed a 25 basis-point increase this month, although they’ve opted to hold rates for now.

Monday’s policy meeting was the first for Colombian Finance Minister Jose Manuel Restrepo, who took office last month.

©2021 Bloomberg L.P.

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