Saturday, December 18, 2021

Colombia wraps up week as 11th nation to raise rates

     Colombia's central bank raised its main interest rate for the third time this year, the 14th country this week to tighten monetary policy, as authorities worldwide roll back last year's extraordinary stimulus that was injected to help the global economy overcome the ravages of the COVID-19 pandemic.
      The Central Bank of Colombia (CBC) raised its benchmark interest rate by another 50 basis points to 3.0 percent and has now raised it 1.25 percentage points this year following rate hikes in September, October and Friday.
      Last week 11 central banks - Armenia, Pakistan, Hungary, Chile, Costa Rica, Norway, the UK, Mexico, Russia, Azerbaijan and Colombia - raised their main interest rates, boosting the number of global rate hikes this year to 119 by 40 different central banks.
      In addition to last year's 256 rate cuts by 93 central banks, monetary authorities also injected liquidity into banking systems to ensure financial systems didn't freeze up during the crises, and many embarked on quantitative easing by buying government and corporate bonds to keep rates low with the total number of steps taken to loosen monetary policy amounting to 417.
      Although the world's three largest central banks - the U.S. Federal Reserve, the Bank of Japan and the European Central Bank - this week left interest rates at rock-bottom levels, they still joined the trend toward tighter global conditions to curb inflation and will wrap up some of their crises-era asset purchase programs by March next year.
       Including these three tightening moves, the number of steps taken so far this year by central banks worldwide toward tightening their monetary policy stance, including rate hikes, amounts to 170.
     Unlike Colombia's rate hike in October, three of the bank's board members this week voted to raise the rate by an even sharper 75 basis points but the majority of four members voted for the 50 point rate rise.
     In its statement, the board said it decision was based on higher-than-expected inflation in November and rising inflation expectations, and significant economic growth in the fourth quarter of this year that is fueling a rise in the current account deficit.
     The board reiterated its commitment to ensuring inflation returns to its target of 3.0 percent.
     Colombia's inflation rate has risen in the last seven months and rose to 5.26 percent in November from 4.58 percent in October, leading CBC to raise its estimate of inflation this year to an average of 5.3 percent and the forecast for 2022 to 3.7 percent.
      Inflation expectations, even for the medium term, now top the bank's target of 3.0 percent, CBC said.
      "Leading indicators suggest that GDP continued on a significant growth trajectory in the fourth quarter, surpassing pre-pandemic levels," the central bank said, confirming its forecast for gross domestic product growth this year of 9.8 percent.
     Colombia's economy expanded 13.2 percent year-on-year in the third quarter quarter of this year, down from 17.6 percent in the second quarter but in November the bank had raised its forecast for growth this year to 9.8 percent from September's forecast of 8.6 percent.
      Rising domestic demand is fueling imports, with Colombia's imports rocketing an annual 64.9 percent in September, widening the trade deficit by US$2.2 billion in September, the largest gap since 1980.
      This is boosting the country's current account deficit, which rose to US$5.12 billion in the third quarter from $4.27 billion in the second quarter, and CBC raised its estimate for a deficit this year of 5.6 percent of GDP from October's estimate of 5.3 percent.
      Next year CBC expects the deficit to narrow to 4.9 percent in 2022 as global financial conditions tighten.
      After falling to a new record low of 4.17 to the U.S. dollar in March last year after the outbreak of the pandemic, Colombia's peso bounced back through the rest of 20202. 
      But starting in January this year, the peso began to loose strength and dropped to more than 4 peso to the U.S. dollar late last month and then hit 4.03 to the dollar yesterday prior to the rate hike. 
      Following the rate hike, the peso jumped 1.5 percent to 3.97 but remains 13.8 percent below its level at the start of this year.

     The Central Bank of Colombia issued the following statement:


"Banco de la República's board of directors (BDBR) raises interest rates by 50 basis points

The board voted 4-3 to raise the benchmark interest rate by 50 basis points to 3.0%; three board members voted for a 75-basis point increase.

The decision was based on the following considerations:

  • Annual inflation in November exceeded expectations, rising 68 basis points from October to 5.26%. Annual core inflation (CPI excluding food and regulated items) rose 52 basis points to 2.54%. These results led to a revision in the inflation forecast to 5.3% in 2021 and 3.7% in 2022.
  • Leading indicators suggest that GDP continued on a significant growth trajectory in the fourth quarter, surpassing pre-pandemic levels. The technical staff reaffirmed its 2021 GDP growth projection at 9.8%.
  • The current account deficit is expected to rise to 5.6% of GDP in 2021, largely explained by growth in domestic demand. The deficit would decrease to 4.9% of GDP in 2022 amid tighter international financial conditions.
  • Inflation expectations rose above the 3% target, even in the medium term, implying a risk of indexation processes at higher inflation rates.
  • The BDBR reiterated its commitment to ensuring that inflation converges to the 3% annual target."


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