Friday, June 20, 2014

Colombia raises rate 25 bps, doubles Q3 FX intervention

    Colombia's central bank raised its benchmark intervention rate for the third time in a row to curb inflationary pressures and doubled the amount it will use to purchase foreign exchange in the third quarter to $2 billion.
    The Central Bank of Colombia raised its key policy rate by 25 basis points to 4.0 percent and has now raised it by a total of 75 points since April.
    Today's rate raise was expected by economists following last week's publication of minutes of the bank's May meeting that showed concern by some of the bank's board members over faster-than-expected economic growth and the risks from growing debt.
    In today's statement, the bank's monetary board echoed these concerns.
    "In the past month increased upside risks weighed on inflation," the central bank said, adding that faster than expected growth in the first quarter along with revised figures for 2013 "could lead to the emergence of faster than expected inflationary pressures."
    As in previous months, the bank said a gradual adjustment of the bank's expansionary stance would reduce the need for sudden changes in the future, given the lag with which monetary policy affects inflation and growth.

    "The board will continue to carefully monitor the performance and projections of economic activity and inflation in the country, in asset markets and the international situation," the bank said.
    Colombia's headline inflation rate climbed to a higher-than-expected 2.93 percent in May, the sixth month in a row with accelerating prices, and inflationary expectations also rose. The central bank targets inflation at a midpoint of 3.0 percent.
    The rise in inflation means that real interest rates are falling, with credit continuing to accelerate in May on the back of commercial and mortgage loans, while the decline in consumer credit stopped.
    Colombia's Gross Domestic Product expanded by an annual rate of 6.4 percent in the first quarter of this year - significantly higher than the central bank had expected - and 2013 growth was revised upwards with domestic demand buoyant, particularly investments, the bank said.
     Preliminary data showed that Colombia's economy expanded by 4.3 percent in 2013, up from 4.0 percent in 2012. In March the central bank forecast growth this year of between 3.3 and 5.3 percent, with 4.3 percent the more likely outcome.
    "This new information increases the likelihood that the economy will be close to full use of its production capacity in 2014," the central bank said.
    Colombia's peso has strengthened since mid-March and the central bank exhausted its second quarter $1 billion intervention program.
    The peso was quoted at 1882.8 to the U.S. dollar today, up from 1930 at the end of last year, and Colombia's president has been quoted as saying that the ideal exchange rate would be between 2,000 and 2,200 pesos to the dollar.


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