Colombia Set to Hold Rate Despite Inflation Jump: Decision Guide

Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Colombia’s central bank is set to hold its benchmark interest rate despite mounting inflation risks fueled by domestic unrest, even as other Latin American economies tighten monetary policy or signal they’re about to do so.

The seven-member board of the bank will hold its key rate at a record low of 1.75%, according to all 19 economists surveyed by Bloomberg.

The decision is expected for 1 p.m. local time. These are the most important points investors will be focusing on:

Unrest and Inflation

Protests sparked by a badly-timed tax bill seeking to raise government revenue to cope with the Covid-19 crisis ignited demonstrations across the nation that morphed into a series of protests against unemployment, poverty, corruption and other grievances. Some protesters blocked key highways and the main nation’s port in the Pacific.

The blockades disrupted supply of food and staples causing the fastest jump in monthly inflation since 1998 and taking the annual rate to 3.3%. Even as food prices are expected to ease as supplies get back to normal, analysts surveyed by the bank see inflation ending the year at 3.68%, above the mid-point of the 2%-4% target range.

Colombia Set to Hold Rate Despite Inflation Jump: Decision Guide

Economic Recovery

The economy grew faster than expected in the first quarter, surprising analysts and the central bank who lifted its growth forecast for 2021 to 6%, despite the protests and roadblocks. Economic activity also surprised to the upside in April and, while analysts expect to see the biggest impact from unrest in May, government officials and the central bank forecast a rebound in the second half of the year as the vaccination campaign advances, boosting internal consumption, and higher oil prices coupled with bigger external demand benefit foreign trade.

What Bloomberg Economics Says

“The central bank is likely to hold the benchmark interest rate at 1.75% and keep a neutral bias at its June meeting. It is poised to overlook high headline inflation in May and emphasize core prices remain low and expectations are stable and in line with the target. Policy makers are likely to note activity remains below its pre-pandemic level and growth has lost momentum.”

--Felipe Hernandez, Latin America economist

Possible Surprise

Traders see the Colombian central bank raising borrowing costs by 75 basis points over three months, starting in July. “It would reflect the fast process of normalization in other emerging countries,” Gustavo Acero, an analyst at Banco de Bogota SA, said in a message.

Goldman Sachs Group Inc. sees a 30% probability of a surprise rate hike Monday, while Oxford Economics estimates that will happen as soon as July. Economists surveyed by the central bank expect that move in October.

Elsewhere in Latin America, 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.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.