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Colombia Holds Key Rate but Signals Tightening to Come

Colombia Holds Key Rate but Signals Tightening to Come

Colombia’s central bank left its key interest rate unchanged but signaled that it may soon join the regional trend for tighter monetary policy as the growth outlook improves.

The bank left its key interest rate unchanged at a record low of 1.75% on Friday, in line with expectations. Two of the seven board members voted for a quarter-percentage point increase.

Colombia Holds Key Rate but Signals Tightening to Come

The bank also boosted its forecast for economic growth this year to 7.5%, from 6.5%.

“The members of the board considered that the space for continuing the current level of monetary stimulus is narrowing, given the behavior of inflation and its possible persistence, as well as the upward revision of growth forecasts,” the bank said in its statement.

Policy makers in Mexico, Brazil and Chile raised borrowing costs in recent weeks as their economies rebound from the pandemic and inflation pressures mount. Central bank co-director Roberto Steiner said this month that he is looking at expectations for core inflation and the output gap, among other indicators, to determine when the moment has arrived to follow regional peers in tightening policy.

Supply Chains

After nearly a year below the 2% lower bound of the target range, inflation spiked in May as weeks of mass anti-government protests and roadblocks disrupted supply chains and shut off Colombia’s main Pacific port. Annual inflation accelerated to 3.63% in June, the fastest pace since the pandemic hit the country in March last year.

The economy’s growth this year won’t be enough to restore a pre-pandemic level of output. The labor market, in particular, is still far from having recovered. The national unemployment rate stood at 14.4% in June, from less than 10% in the same month in 2019, with 3.5 million Colombians now out of work.

Over the last month, Fitch Ratings became the second rating company cutting the nation’s rating to junk in the wake of a failed bid to raise taxes. Colombian stocks are the world’s worst performers in dollar terms this year.

©2021 Bloomberg L.P.