Colombia's central bank raised its benchmark intervention rate for the second time in as many months to ensure that inflation converges towards it target and again said a "gradual adjustment of the expansionary stance of monetary policy reduces the need for sudden changes in the future and ensure macroeconomic stability."
The Central Bank of Colombia has now raised its benchmark rate by a total of 50 basis points to 3.75 percent by raising it by 25 basis points in April and today.
The first rate rise in April of 25 basis points surprised financial markets and the central bank also said at that time that it was raising rates to avoid a sharper tightening in the future. The central bank cut rates by 100 basis points during the first quarter of 2013.
Inflation in Colombia continued to accelerate toward the central bank's 3.0 percent midpoint target in April, hitting 2.72 percent, up from 2.51 percent in March and the fifth month of rising prices.
The bank said inflationary expectations one year ahead had risen from last month and the economic forecast indicates that domestic demand will continue to grow steadily and the economic will approach full use of capacity this year while unemployment continues to trend lower.
"Given all this and the lags with which monetary policy actions affect inflation and growth, the Board considered it prudent to increase the intervention interest rate by 25 basis points," the central bank said, adding that monetary policy would depend on available information.
Given the rise in inflation, real interest rates have declined, the bank said, adding that credit had also continued to accelerate between April and May due to commercial and mortgage loans.
Colombia's peso, like that of several emerging market economies, has strengthened since mid-March and the central bank used its entire quota for foreign exchange intervention that month.
On May 13 the peso weakened after Colombia's finance minister, Mauricio Cardenas, said the government would use its own money to buy dollars as the central bank had exhausted its second quarter $1 billion intervention program.
But after a brief weakening to 1931 to the U.S. dollar on May 15, the peso resumed its upward trend and ended this week around 1898 to the U.S. dollar, up 1.6 percent since the start of the year. Bloomberg quoted Bogata-based brokerage Ultrabursatiles as saying the government wants to prevent the peso from rising above 1,900 per dollar to help the country's exporters.
Bloomberg also said Colombia's President, Juan Manuel Santos, had said in a radio interview on May 12 that the "ideal" exchange rate would be between 2,000 and 2,200 pesos per dollar.
Colombia's economy expanded by 4.3 percent in 2013, up from 4.0 percent in 2012, and in March the central bank forecast growth in 2014 of between 3.3 and 5.3 percent, with 4.3 percent the more likely outcome.
On May 19 the International Monetary Fund said Colombia's growth is projected to remain robust this year and beyond although risks are tilted to the downside. The risks include a sharp decline in commodity prices, especially oil, a deterioration in global financial conditions and volatility from the normalization of monetary policy in the U.S.
The IMF projected that Colombia's Gross Domestic Product would expand around its potential rate of 4.5 percent in 2014 and beyond with inflation within the central bank's target range of 3.0 percent, plus/minus one percentage point.