The Central Bank of Colombia, which raised its rate by 125 basis points from April thorough August, added that the drop in oil and rising international prices of some relevant foods had led to a deterioration in the country's terms of trade with a negative impact on the growth of national income.
Oil accounts for about half of Colombia's exports. The central bank has been buying U.S. dollars since 2012, including more than $4 billion this year and $6.8 billion in 2013.
Colombia's peso currency has depreciated since July and this has pushed up inflation but the central bank said it did not expect "significant effects on inflation expectations" as long as the depreciation is moderate.
The peso has been declining since July with the depreciation picking up speed in November. But part of the decline was reversed in the last two days. Today the peso was quoted at 2,300 to the U.S. dollar, a depreciation of 16 percent since the start of this year.
Colombia's headline inflation rate rose to 3.65 percent in November from 3.29 percent in October, but the central bank said the deviation from its 3.0 percent midpoint target was temporary and mainly due to temporary factors. It added that core inflation was below 3.0 percent and headline inflation is expected to converge to that level.
Colombia's core inflation rate rose to 3.09 percent in November from 3.02 percent.
Colombia's Gross Domestic Product expanded by 0.6 percent in the third quarter from the second quarter for annual growth of 4.2 percent, down from 4.3 percent, and below the central bank's expectations of 4.6 percent.
But the bank said consumer confidence, retail trade, car sales and consumer credit suggest that domestic demand "remains dynamic."
The Central Bank of Colombia issued the following statement (translation by Google):
"The Board of the Central Bank at its meeting today decided to keep interest rates at 4.5% intervention. In this decision, the Board took into account mainly the following aspects:
- International oil prices have fallen considerably and are at levels not seen since 2009. This decrease reflects increases in supply, lower demand and stronger dollar. Uncertainty about the future price of this basic good is high.
- The drop in oil prices and rising international prices of some foods that matters Colombia have generated a deterioration in the terms of trade of the country. This negatively affects the growth of national income.
- The currencies of several emerging countries continue to depreciate, country risk premiums have gone up and the price of financial assets has fallen. The exchange rate peso-dollar has risen considerably and showed a strong volatility.
- The performance of the world economy remains weak. The US economy continues to recover while the euro area and Japan have low growth. Output growth in key emerging countries continues to slow or has historically low magnification. It is possible that the recovery of our trading partners in 2015 is, on average, weaker than estimated in previous months.
- In Colombia, GDP growth in the third quarter of 2014 (4.2%) was lower than expected (4.6%). The results of consumer confidence, retail trade, car sales and consumer credit suggest that domestic demand remains dynamic.Moreover, other indicators by the supply side, such as industry and oil production, have low annual increases.
- Inflation at the end of 2014 will be placed in the upper half of the target range. The deviation from the central point of 3% is temporary and is mainly explained by the correction of transient falls in some past price and temporary increases in others. Core inflation is below 3% and is expected to headline inflation converges to that value.
- The depreciation of the peso has been partially transferred to tradable CPI excluding food and regulated. The volatility of the exchange rate and possible corrections may limit the level crossing. Additionally, if depreciation is moderated, it is expected that the transmission continues, but no significant effects on inflation expectations.
In short, domestic demand continues to show a healthy momentum in the near full utilization of productive capacity context. At the same time, inflation and expectations are placed slightly above 3%. This occurs in an environment of declining terms of trade, the depreciation of the peso and growing uncertainty about the recovery in global economic activity and the cost of external financing, factors that may influence future behavior of aggregate demand . Made assessing the balance of risks, the Board considered appropriate to maintain unchanged the benchmark interest rate.
The Board will continue to carefully monitor the behavior and projections of economic activity and inflation in the country, asset markets and the international situation. It reiterates that monetary policy will depend on the information available.
Finally, given the levels reached in several indicators of hedging external liquidity as well as recent changes in the exchange market conditions, the Board decided not to continue buying foreign reserves."