Colombia raises rate 25 bps to avoid sharp hikes later

    Colombia's central bank raised its benchmark intervention rate by 25 basis points to 3.50 percent in what the central bank described as a "prudent" move to pull back on its expansionary policy now to avoid a sharper tightening of monetary policy in the future.
    The rate rise by the Central Bank of Colombia was not widely expected by financial markets and the bank said future policy decisions would depend on new information.
    But given the long time it takes for monetary policy decisions to affect inflation and growth, the central bank said its "board considered it prudent to increase the intervention rate by 25 basis points."
     Colombia's central bank had held rates steady since April 2013 after cutting them by 100 basis points in the first quarter of last year.
    "The (central bank's) board considers that the current macroeconomic stability and the convergence of inflation towards the long term goal support a current position of a slightly less expansionary monetary policy," the bank said, adding that a "gradual and timely" adjustment of its policy would reduce the need for sharp adjustments in the future and ensure macroeconomic stability.

    Improving growth and rising inflation had led most economists to first expect a rate rise in the coming months.
    Colombia's headline inflation rate rose to 2.51 percent in March, the fourth consecutive month of rising consumer prices, and the central bank said the gradual convergence of inflation to its midpoint 3.0 percent target had led to lower real interest rates, with growth in total credit accelerating slightly in March, driven by commercial and mortgage loans.
    The bank added that inflationary expectations still revolve around the 3 percent level.
    Colombia's Gross Domestic Product expanded by 0.8 percent in the fourth quarter of 2013 from the third quarter for annual growth of 4.9 percent, down from 5.4 percent.
   Last year, Colombia's economy expanded by 4.3 percent, up from 4.0 percent in 2012, and in March  the central bank forecast growth this year between 3.3 percent and 5.3 percent, with 4.3 percent the more likely outcome.
    "The macroeconomic forecast indicates that domestic demand will continue to grow steadily and the economy will approach full use of its production capacity in 2014," the bank said.
    Capital inflow to Colombia has been improving recently, in line with a general decline of risk premiums of several emerging economies, which has led to an appreciation of currencies against the U.S. dollar, the bank said.
    Last week Colombia's finance minister, Mauricio Cardenas, said the central bank had been speeding up its dollar purchases due to the rising peso.
    In March the central bank extended its dollar-buying program for the second quarter by up to $1 billion. The central bank has been intervening in foreign exchange markets for more than two years to keep down the peso and aid its export industry.
    The peso depreciated gradually through 2013 and fell sharply from mid-January through mid-March. Since then it has rebounded, but is still down 0.7 percent this year, trading at 1943.4 to the U.S. dollar today.

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