Colombia Lifts Interest Rate for First Time in Five Years
(Bloomberg) -- Colombia raised interest rates for the first time in five years, following in the footsteps of all the other major inflation-targeting economies in Latin America struggling to curb a surge in prices.
The seven-member board voted to lift the benchmark rate by a quarter percentage point to 2% in a split decision, central bank Governor Leonardo Villar told reporters after the meeting. Three of the board voted for a bigger increase, of half a percentage point.
Central banks in Brazil, Mexico, Chile and Peru have all been withdrawing stimulus in recent weeks as inflation overshot its target in one country after another. As economies eased measures to curb the pandemic, pent-up demand pushed prices higher, while consumers were also hit by higher global food and energy costs.
Villar said “the process of policy normalization” is now underway. Underpinning the decision were the bank’s updated forecasts showing the economy heating up, with both growth and inflation faster than previously expected.
The bank boosted its forecast for 2021 economic growth to 8.6%, from 7.5%, following a record contraction in 2020. It also increased its forecast for inflation this year to 4.5% from 4.1% previously. Inflation will still be at 3.5% at the end of 2022, Villar said, from a previous forecast of 3.1%.
Consumer prices rose 4.4% in August from a year earlier, above the upper limit of the central bank’s target range of 3% plus or minus one percentage point.
What Bloomberg Economics Says
“Increasing inflation expectations through September have reduced room for Colombia’s central bank to maintain large monetary accommodation. Recovering activity has weakened arguments to continue providing significant stimulus. Along with concerns about macro imbalances and financial stability and risks from keeping rates too low for too long, data support a liftoff.”
-- Felipe Hernandez, Latin America economist
Today’s decision was forecast by 17 out of 20 analysts surveyed by Bloomberg while 2 estimated a half a percentage point increase and one saw no changes.
The meeting was the first for former Finance Minister Alberto Carrasquilla since he was recently appointed co-director.
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