The Central Bank of Colombia raised its policy rate by a further 25 basis points to 7.00 percent and has now raised it by 250 basis points since September last year when it embarked on a tightening cycle. In 2016 it has raised the rate by 125 points.
Inflation in Colombia rose to 7.98 percent in March from 7.59 percent in February to the highest rate since October 2001, with the central bank attributing the pressure on inflation to the sharp increase in food prices and the partial transfer of the devaluation of the peso to domestic prices.
At the same time, the central bank said the risk of an excessive slowdown in domestic demand remains moderate.
The central bank added that it was committed to keeping inflation and expectations anchored to its target of 3.0 percent - plus/minus 1 percentage point - recognizing that the increase in inflation is of a transitory nature.
The Central Bank of Colombia issued the following statement:
"The Board of the Bank of the Republic in its meeting today decided to increase the interest rate by 50 bp intervention and stood at 7.0%. In this decision, the Board took into consideration mainly the following aspects:
- In March annual consumer inflation and average basic inflation measures increased and stood at 7.98% and 6.29%, respectively. Measures of inflation expectations of analysts to one and two years are 4.5% and 3.8%, and those arising from public debt papers 2, 3 and 5 years between 4.4% and 4.8%.
- The sharp increase in food prices and the nominal depreciation and partial transmission consumer prices remain largely explaining the rise in inflation. Despite being temporary shocks, the magnitude of the devaluation of the peso and the strength of El Niño have raised the risk of a slower convergence of inflation to the target, both because of its direct impact on prices and expectations inflation activation of indexation mechanisms.
- The new information suggests that global economic activity in 2016 the average growth of trading partners is weak and lower than in 2015. The Federal Reserve of the United States unchanged its benchmark interest rate and is likely to hardening of monetary policy in that country is given more slowly. The price of oil rose and stood above that projected for this year. In this environment, measures country risk fell and the peso appreciated against the dollar.
- The information for the first quarter of 2016 indicates that consumption grew at a similar pace than one quarter ago and investment slowed. On the supply side, indicators of industry, trade and production of coffee suggest a favorable performance, while mining reported deterioration. Thus for the first quarter of this year the technical team projects a likely growth of 2.5%, contained in a range between 1.8% and 3.2%. 2016 for all growth would be between 1.5% and 3.2%, with 2.5% as more feasible figure.
- 2016 is expected to reduce the current account deficit in both dollars (15.948 billion) as a proportion of GDP (5.9%).
In short, the sharp increases in food prices and the partial transfer of the devaluation last domestic prices continue toexert pressure on inflation. Inflation expectations remain high. This in a context where there is overspending on national income and the risk of an excessive slowdown in domestic demand remains moderate. In order to ensure that inflation converges to the target in 2017 and contribute to the reduction in the deficit of the current account, the Board decided toincrease by 50 bp interest rate reference.
The Board will continue to monitor the expected spending adjustment and consistency with the income level of long -term sustainability of the external deficit and overall macroeconomic stability. It also reaffirms the commitment to keep inflation and its expectations anchored to the target, recognizing that there is an increase in inflation transitory nature."