Colombia holds rate on good demand, global uncertainty

    (UPDATES WITH FOREIGN EXCHANGE PURCHASES)
    Colombia's central bank maintained its benchmark intervention rate at 4.5 percent, as expected, but said increased uncertainty about the global economy and the cost of external financing could affect aggregate demand.
    The Central Bank of Colombia, which has raised its policy rate five times in a row for a total rise of 125 basis points, said demand was still showing strong growth and the economy was near full utilization of its capacity while inflation expectations remain around 3 percent.
    However, Colombia's terms of trade are also likely to deteriorate due to the decline in international oil prices, with risk premiums rising slightly for several countries as their currencies depreciate against the U.S. dollar.
    "The Board will continue to carefully monitor the performance and projections of economic activity and inflation in the country, asset markets and the international situation," the central bank said.
    Colombia's headline inflation rate rose to 2.94 percent in August from 2.89 percent in July while second quarter Gross Domestic Product expanded by 4.3 percent from the same quarter last year, in line with the central bank's overall expectations.

   However, the bank noted that the actual composition of demand was different to its forecasts with domestic demand up by 7.7 percent, significantly higher than 5.4 percent expected. Net exports fell sharply, partly due to temporary phenomena, the bank added.
    Growth in the second half of the year is expected around 4.5 percent.
    Annual growth in bank lending is continuing to ease but remains above nominal GDP growth with a slow transmission of the central bank's rate increases.
    In a separate statement, the central bank said it would extend its dollar purchase program, which was due to end this month. The central bank said it would purchase up to US$ 1 billion between October and December. The program that expires this month amounted to $2 billion.
      The central bank targets inflation at a midpoint of 3.0 percent in a range from 2.0 to 4.0 percent.
     Last month the central bank confirmed that it expects the economy to expand by 5.0 percent in 2014, up from 4.7 percent in 2013.
    On Sept. 1 Colombia's president, Juan Manuel Santos, called on the central bank to pause in its tightening cycle.

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