Colombia's central bank raised its policy rate for the fourth consecutive month to ensure that inflation, which is accelerating due to rising food prices and the depreciation of the peso's exchange rate, is pushed back down toward its target.
The Central Bank of Colombia raised its benchmark intervention rate by a further 25 basis points to 5.75 percent in a move that was widely expected and has now raised the rate by 125 points following hikes in September, October and November.
With inflation rising and the peso hit by the fall in crude oil prices - oil and coal account for almost 60 percent of Colombia's exports - inflation expectations remain high while the risk of a slowdown in domestic demand has eased, the central bank said.
With oil prices continuing to fall to below estimates, it reduces Colombia's income and raises the current account deficit, the central bank said.
In addition, this week's "gradual monetary tightening in the United States," raised the risk premium on Colombia and the "peso continued to depreciate against the dollar," the central bank said.
Inflationary expectations one to two years ahead rose to 4.6 percent and 3.8 percent, respectively, and yields on government debt from two to five years remain above 4.5 percent, the bank said.
The central bank targets inflation of 3.0 percent, plus/minus 1 percentage point.
The peso started falling in mid-2014, in line with the fall in crude oil prices, and has now fallen over 40 percent since the start of 2014.
The central bank's latest rate hike had little immediate effect on the peso's exchange rate, with it trading at 3,338 today compared with 3,336 yesterday, down around 29 percent this year. On Monday, prior to the Fed's hike on Wednesday, the peso was trading at 3,322.
Economic growth in the third quarter of this year was higher than expected, the central bank said, as consumption and investment were strong while exports subtracted from growth.
Gross Domestic Product expanded by 1.2 percent in the third quarter from the second quarter for annual growth of 3.2 percent, up from 3.0 percent in the second quarter.
For the full year, the central bank staff forecasts growth near 3.0 percent.
Improving growth has also improved job prospects, with the unemployment rate easing to 8.2 percent in October from 9 percent in September and the employment rate jumping hitting a record high of 61.4 percent in September from 58.7 percent in the previous month and levels around 58 percent over the last three years.