Colombia raises rate 5th month in row as inflation rises

    Colombia's central bank raised its policy rate for the fifth month in a row as inflation accelerates to the highest level in seven years on the back of rising food prices and a continued fall in the peso's exchange rate due to lower oil prices.
    At the same time, the Central Bank of Colombia said inflation expectations remain high and the risk of a slowdown in domestic demand remains moderate.
    The central bank raised its policy rate by another 25 basis points to 6.0 percent and has now raised it by 150 basis points since embarking on a tightening cycle in September last year in an effort to push down inflation to its target range of 3.0 percent, plus/minus 1 percentage point, in 2017.
    Consumer prices inflation accelerated to 6.77 percent in December, a rate not seen since January 2009, while core inflation eased slightly to 5.22 percent, and analysts expect inflation of 4.5 percent and 3.7 percent in one to two years, the bank said.
    Food prices have risen due to drought from the El Nino weather pattern while the peso has continued to depreciate, pushing up import prices.
    The peso started falling in mid-2014, when crude oil prices started to fall, and has now fallen over 41 percent against the U.S. dollar since the start of 2014.
    Today the peso was trading at 3,295 to the dollar, down almost 4 percent this year.
    In the fourth quarter of 2015 Colombia's economy was seen expanding at a rate similar to that of the third quarter, with growth for the full year estimated around 3.0 percent. 
    For 2016 the central bank said its staff is forecasting growth of 2.7 percent, within a range of 1.5 to 3.2 percent, as internal demand adjusts to lower national income. 
    Colombia's Gross Domestic Product expanded by an annual 3.2 percent in the third quarter, up from 3.0 percent in the second quarter and 2.8 percent in the first quarter.
    The current account deficit is projected by the bank to narrow by US$19 billion in 2015 and then a further $16 billion in 2016.


    The Central Bank of Colombia issued the following statement:

"The Board of Directors of Banco de la República at today’s meeting decided to increase the benchmark interest rate by 25 bp to 6.0%. For this decision, the Board mainly took into account the following aspects:

• Annual consumer inflation in December stood at 6.77%, and the average of core inflation indicators posted at 5.43%. Measures of inflation expectations increased: those of analysts to one and two years registered 4.5% and 3.7%, respectively, while those embedded in public debt bonds to 2, 3, and 5 years are above 4.5%. 
• The increase in inflation in 2015 is mainly explained by the partial transmission of nominal depreciation to consumer prices, and by a strong increase in food prices. The magnitude of the depreciation of the peso and the intensity of El Niño will slow down convergence of inflation to the target, due to its direct impact on prices and inflation expectations, as well as by the probable triggering of indexation mechanisms.  
• The most recent figures of economic activity suggest that output growth in the fourth quarter of 2015 would have been similar to that recorded in the third quarter. The dynamism of consumption and investment would have been lower, but net exports would have contributed positively to growth. For all of 2015, economic growth is projected at 3.0% as the most likely figure, within a range between 2.8% and 3.2%.
• The technical staff of Banco de la República forecasts output growth in 2016 within a range from 1.5% to 3.2%, with 2.7% as the most likely outcome. This figure reflects a domestic demand that would continue adjusting to the lower national income. The highest observed level of the exchange rate would be a stimulus for the production of exportable goods and services, and would lead to substitution of imported goods by local production. This is consistent with the projected reduction of the current account deficit from levels close to USD 19 billion in 2015 to USD 16 billion in 2016. 
• The average growth of the country's main trade partners remains weak. It is expected that the US economy in 2016 will expand at a pace similar to that of 2015, driven by domestic demand. The euro zone would continue its slow recovery. China would grow less, while economic activity in the main Latin American countries would maintain low growth or contraction of their output. Thus, it is feasible that in 2016 the external demand for Colombian products would grow more than in 2015, but at a slower pace than forecast one quarter ago.
• In the United States, it is likely that additional, gradual increases of the FED's benchmark interest rate will take place. The price of oil continued to decline, reaching levels lower than had been estimated for 2016. This decline implies a further deterioration in the terms of trade and, therefore, of the country's national income. In this environment, and with the beginning of a gradual tightening of the monetary policy in the United States, the country's risk premium increased again, while the peso continued to depreciate vis-à-vis the US dollar.
   

In synthesis, higher-than-expected increases in food prices and further increases in the exchange rate, related largely to the fall in the price of oil, continue exerting inflationary pressures. At the same time, inflation expectations remain high and the risk of a slowdown in domestic demand, exceeding that which is consistent with the decline in national income, continues to be moderated. In order to ensure convergence of inflation to the target range in 2017, the Board of Directors decided to continue the path of its 25 bp increases of the benchmark interest rate.
 

The Board reiterates its commitment to the inflation target and continues to monitor the behavior and projections of economic activity and inflation in the country carefully, as well as that of asset markets and the international situation."

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