Colombia Lifts Key Rate to 3% as Inflation and Growth Soar

(Bloomberg) -- Colombia’s central bank raised borrowing costs for the third straight meeting as inflation accelerates amid forecasts for the biggest economic expansion in at least a century. 

The bank lifted its benchmark interest rate by half a percentage point to 3% in a split decision, Governor Leonardo Villar told reporters on Friday, adding that three of the seven board members voted for a steeper hike of 75 basis points. The move was expected by 23 of 26 economists surveyed by Bloomberg, with the remaining three estimating a bigger increase.

“Inflation expectations have increased above the 3% target,” policy makers wrote in a statement accompanying their decision.  “That risks inducing an indexation process that would lead to higher inflation levels.”

Every major inflation-targeting central bank in Latin America has withdrawn stimulus in recent months to curb above-target price increases as their economies rebound from the pandemic. Mexico unexpectedly accelerated the pace of monetary tightening on Thursday, two days after Chile lifted its borrowing costs. Among developed economies, the Bank of England surprised investors with a 15 basis-point increase to its benchmark rate, while the U.S. Federal Reserve said three rate hikes are on tap for next year.

Governor Villar said more interest rate increases are to come as the nation is not in a recession where the economy needed a strong monetary stimulus. 

COLOMBIA REACT: Central Bank Pondering Bigger Rate Hikes

“We have to continue adjusting upwards to bring it to a more neutral level, closer to monetary normality,” Villar said in the post-decision press conference. “Conditions are no longer what we had in 2020 or early 2021 when we were facing a major recession.”

Colombian policy makers estimate the economy will expand nearly 10% this year, the most in at least 100 years, after beating expectations in the third quarter. Its post-pandemic recovery is being further helped by rising prices of oil, coal and coffee -- the country’s main export products. 

Annual inflation accelerated to 5.3% last month, its fastest pace since early 2017 and above the 3% target, which includes a margin of tolerance of plus or minus 1 percentage point.

Across Latin America, pent-up consumer demand caused prices to jump after authorities eased restrictions on commerce and movement, while food and energy costs soared globally. In Colombia, a 10% increase to the minimum wage next year is also expected to add to inflationary pressures. 

©2021 Bloomberg L.P.