Colombia hikes rate 2nd time, raises GDP, CPI outlook

     Colombia's central bank raised it main interest rate for the second consecutive month and its forecast for economic growth and inflation as economic activity bounces back faster than expected.

     The Central Bank of Colombia (CBC) raised its benchmark interest rate by a further 50 basis points to 2.50 percent and has now raised it 75 points this year following a hike in September.

     The central bank said its board was unanimous in its decision to continue normalizing monetary policy, with five members voting for a 50-point rate hike and two members voting for a 25-point hike.
    "Economic activity continued to recover at a greater pace than previously expected, a reflection of strengthening domestic demand that has benefitted largely from monetary, fiscal, and regulatory policies implemented since the start of the pandemic," CBC said.
     In response to the COVID-19 pandemic, CBC slashed its rate seven times in 2020 by a total of 2.50 percentage points from February to September.
     These rate cuts extended CBC's monetary easing cycle that began in December 2016, with the rate lowered a total of 6 percentage points from then until last month's rate increase.

      Colombia's inflation rate has been accelerating the last five months and rose to 4.51 percent in September from 4.44 percent in August, above the central bank's target of 3.0 percent, plus/minus 1 percentage point.

     The central bank's staff revised upward its projections for inflation at the end of this year to 4.9 percent from last month's 4.5 percent and forecast end-2022 inflation of 3.6 percent, up from 3.5 percent.

     Colombia's economy grew a faster-than-expected 17.6 percent year-on-year in the second quarter of this year, up from 1.1 percent in the first quarter, and CBC raised its forecast for growth this year to 9.8 percent from September's forecast of 8.6 percent.

     For 2022 the bank forecast 4.7 percent growth, up from last month's forecast of 3.9 percent.

     Reflecting the strong growth in domestic demand, CBC said it expects a current account deficit of 5.3 percent of gross domestic product this year, with the deterioration against a backdrop of tightening international conditions.

     Earlier this month CBC's governor, Leonardo Villar, told Bloomberg the process of normalizing monetary policy after a period of low interest rates may take about 12 months.

     

         The Central Bank of Colombia issued the following statement:

"Banco de la República's board decides unanimously to continue monetary policy normalization

The board voted 5-2 to raise the benchmark interest rate by 50 basis points to 2.5%; the two dissenting board members voted for a 25-basis point increase.

This decision was based on the following considerations:

• Economic activity continued to recover at a greater pace than previously expected, a reflection of strengthening domestic demand that has benefited largely from monetary, fiscal, and regulatory policies implemented since the start of the pandemic. As a result, GDP growth projections have been revised upward to 9.8% for 2021 and 4.7% for 2022.
   
• Annual inflation at the end of September was above expectations at 4.51%, in large part due to the price behavior of foods and regulated items. Banco de la República's technical staff has revised its year-end inflation projections upward to 4.9% for 2021 and 3.6% for 2022.
   
• Recent labor market trends have been positive, as significant increases in employment levels have allowed for a continued decline in national and urban unemployment rates. While these figures remain above historical averages, the recovery in economic activity suggests that favorable labor market trends should continue in the coming months.
   
• The current account deficit is expected to expand to 5.3% of GDP in 2021, reflecting significant growth in domestic demand. This deterioration in the balance of payments comes amid a tightening of international conditions."

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