Colombia Raises Key Rate to 5-Year High in Split Decision

(Bloomberg) -- Colombia’s central bank raised interest rates to a 5-year high in a split decision to curb soaring inflation in the fast-growing economy.

The bank lifted borrowing costs by one percentage point to 6%, Governor Leonardo Villar told reporters after the meeting on Friday. The move was in line with expectations, but three of the seven member-board voted for a bigger increase, of 1.5 percentage point. 

“The board continues its gradual but firm process of monetary policy adjustment to ensure a progressive return of inflation to its 3% target,” the bank said in its statement. 

The bank also increased its forecast for economic growth this year to 5%, from 4.7%. 

Central banks across Latin America are withdrawing stimulus to prevent temporary price spikes from triggering a wage-price spiral. Inflation was above its target in all the region’s major economies even before Russia’s invasion of Ukraine sent prices of wheat, fertilizer, and energy rocketing. 

Peru raised its key rate by half a percentage point this month, and Brazil, Mexico, and Chile have also been tightening policy in recent weeks.

Annual inflation accelerated in March to a six-year high of 8.5%. The central bank will continue to tighten policy at its next two meetings, according to the bank’s most recent survey of economists. 

Read more: Colombian Inflation Surges to Six-Year High Ahead of Election

“A restrictive monetary stance is warranted given the resilient growth dynamics, above-target inflation, drifting inflation expectations, and a large external deficit whose funding could become more challenging as global financial conditions tighten,” Goldman Sachs & Co. economist Sergio Armella wrote in a note before the decision.

Presidential Vote

Colombia will grow the most among major economies in Latin America this year, according to a forecast by the International Monetary Fund.

Colombians vote for president on May 29, with a likely runoff in June. Recent polls point to a second round between leftist senator Gustavo Petro, and Federico “Fico” Gutierrez, a conservative former mayor of Medellin.

COLOMBIA INSIGHT: Election Front-Runner’s Plans Risk Outlook

Many investors are wary of Petro and his anti oil and mining stance. But despite Petro’s strong performance in polls, Colombian bonds haven’t suffered massive outflows.

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