The Central Bank of Colombia raised its policy rate by another 25 basis points to 6.50 percent and has now raised it by 200 basis points since embarking on a tightening cycle in September 2015.
Rising food prices and the effect of the depreciation of Colombia's peso on import prices continues to exert pressure on inflation, the bank said, adding inflation expectations remain high while the risk of a slowdown in demand in excess of the decline in national income is moderate.
Although the El Nino weather pattern and the peso's devaluation are temporary shocks, the central bank said they still raise the risk of inflation being slower to converge to the target, both due to the direct impact on prices and inflation expectations.
Colombia's inflation rate accelerated further in February to 7.59 percent, the highest rate since December 2008, from January's 7.45 percent, with the cost of food up by 11.9 percent.
Inflation expectations by analysts one- and two-years ahead were 4.5 percent and 3.8 percent, the bank said.
The central bank targets inflation of 3.0 percent, plus/minus 1 percentage point.
Colombia's economy grew by a faster-than-expected annual rate of 3.3 percent in the fourth quarter of last year, up from 3.2 percent in the third quarter as domestic demand weakened less than expected and exports and imports fell lower than forecast.
For the full 2015 year, growth was 3.1 percent and the central bank has forecast 2.7 percent growth this year in a range of 1.5 to 3.2 percent.
The current account deficit in 2015 eased by US$ 668 million to $18.925 billion, the bank said.
Colombia's peso has been falling since mid-2014, when crude oil prices started to plunge, and fell by 25 percent against the U.S. dollar in 2015.
But since mid-February the peso has been firming, helped by the rate hikes and the central bank's willingness to support the currency by auctioning dollar call options when the peso falls 3 percent from its 20-day moving average.
The peso was trading at 3,073 to the dollar today, up 3.3 percent so far this year.
The Central Bank of Colombia released 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 6.5%. For this decision, the Board mainly took into account the following aspects:
• In February, annual consumer inflation and the average of core inflation measures continued to rise and stood at 7.59% and 6.07%, respectively. Analysts’ inflation expectations to one and two years registered 4.5% and 3.8%, respectively, while those embedded in public debt bonds to 2, 3, and 5 years are between 4.5% and 4.9%.
• The strong increase in food prices as well as nominal depreciation and its partial pass-through to consumer prices largely explain last year's increase in inflation. Although they are considered temporary shocks, the magnitude of the depreciation of the peso and the intensity of El Niño increase the risk of a slower convergence of inflation to the target, due to its direct impact on prices and inflation expectations as well as to the triggering of indexation mechanisms.
• In the United States, the FED maintained its benchmark interest rate, and a slower tightening of monetary policy in that country is now more likely. The price of oil increased above the expectations of the technical staff for the current year. In this environment, risk measures for the country fell, and the peso appreciated vis-à-vis the US dollar, thus reverting part of the deterioration of the external conditions of the economy registered in recent months.
• In the fourth quarter of 2015, the Colombian economy grew 3.3%, a figure higher than expected by the technical staff. Domestic demand weakened less than expected, and exports and imports recorded lower falls than had been estimated. For all 2015, growth posted at 3.1%, with a slower domestic demand. In the same year, the current account deficit was US$ 18,925 m, a figure US$ 668 million lower than the one registered for 2014.
• In February, the Consumer Confidence Index recorded historically low levels again; uncertainty about the persistence of this low level and its impact on household spending remains high. The urban unemployment rate exhibited a significant rebound, especially in Bogotá. In contrast, retail sales (excluding vehicles), cement production and shippings, and industrial production recorded increases that surpass those expected by the technical staff in several cases. With all this, the technical staff maintained its economic growth forecast for 2016 at 2.7% as the most likely figure, within a range between 1.5% and 3.2%.
In summary, a significant gap between expenditure and national income persists. High increases in food prices and the partial pass-through of depreciation to domestic prices continue to exert inflationary pressures. Inflation expectations remain high, and the risk of a slowdown in domestic demand in excess of that which is consistent with the decline in national income continues to be moderated. In order to ensure convergence of inflation to the target in 2017, and to contribute to the reduction of the current account deficit, the Board of Directors decided to continue with the path of 25 bp increases of the benchmark interest rate.
The Board reiterates its commitment to the inflation target and continues to carefully monitor the behavior and projections of economic activity and inflation in the country, as well as that of asset markets and the international situation."