Friday, January 28, 2022

Colombia raises rate 4th time, inflation forecast raised

      Colombia's central bank raised its key interest rate for the fourth time - the sixth central bank to raise rates this week and the 16th this year - citing higher-than-expected inflation and a "significant" increase in inflation expectations.
     The Central Bank of Colombia (CBC) raised its interest rate by 1 percentage point to 4.0 percent - the most aggressive rate hike since it began raising rates in September last year - and has now raised it by a total of 2.25 percentage points.
     In September last year CBC raised its rate by 25 basis points and then followed this up with 50 point hikes in both October and December before today's 100 point hike.
    "This decision is compatible with the dynamism of an economy that has recovered rapidly and does not require the same degree of monetary stimulus that the Bank duly provided throughout the crises caused by COVID-19," CBC said.
     Today's rate hike comes after Colombia's government raised minimum wages by 10 percent - the highest raise in 50 years - which analysts said added pressure on the central bank to raise rates faster.
     CBC has now almost fully unwound its 7 rate cuts in 2020 from February to September in response to the pandemic, with the cuts totaling 2.50 percentage points.
     The bank's board was split in its today's decision, with five voting for the 100-point rate hike while two board members voted for a 75-point increase.
     The board was also split in December, when four members voted for the 50-point rate hike while three members voted for a 75-point hike.
      Inflation in Colombia rose to a 2021-high of 5.62 percent in December, 30 basis points higher than the central bank's staff had forecast, while the measure of basic inflation, which excludes food and regulated items, ended the year at 2.49 percent.
     "The results of inflation in 2021 induced a significant increase in inflation expectations measured from various sources, including non-food inflation," said CBC, which targets inflation of 3.0 percent.
     The bank's staff raised its forecast for headline inflation in 2022 to 4.3 percent from an earlier 3.7 percent and forecast core inflation of 4.5 percent.
     In 2023 CBC expects headline inflation of 3.4 percent and core inflation of 3.6 percent.
     Colombia's economy has recovered swiftly from the pandemic and CBC said indicators for November show continued expansion, which confirms the bank's forecast for growth of close to 10 percent in 2021.
     Economic output last year thus exceeds that of 2019 and excess capacity is close to being eliminated, the central bank added, forecasting growth in 2022 of around 4.3 percent.
     CBC also said the current account deficit would end 2021 around 5.7 percent of gross domestic product, slightly up from the December estimate of 5.6 percent.
     This year, however, CBC expects the deficit to ease to 4.9 percent of GDP.
     Today's rate hike comes after Colombia's government raised minimum wages by 10 percent - the highest raise in 50 years - which analysts said added pressure on the central bank to raise rates faster.

     The Central Bank of Colombia issued the following statement:

"The board voted 5-2 to raise the benchmark interest rate to 4.0%; two board members voted for a 75-basis point increase.

The decision was based on the following considerations:

  • Headline inflation continued on an upward trajectory, rising 0.73% in December and outpacing the technical staff's projection by 30-basis points. As a result, overall consumer inflation ended the year at 5.62%. Core inflation, measured excluding food and regulated items, closed the year at 2.49%, while the year-end average of core inflation indicators was 3.45%.
  • Inflation results in 2021 led to a significant increase in inflation expectations from a variety of sources, among them inflation excluding food. The technical staff revised its headline and core inflation forecasts upward to 4.3% and 4.5% respectively in 2022, and to 3.4% and 3.6% in 2023.
  • Data from the monthly economic tracking indicator (ISE) suggests that economic activity continued to expand in November. As a result, the technical staff was able to reaffirm its GDP growth forecast for 2021, at close to 10%. With this, annual GDP in 2021 would surpass 2019 levels, and remaining excess capacity in the economy would nearly be overcome. GDP growth in 2022 would be projected at around 4.3%.
  • The current account balance of payments is expected to close 2021 with a deficit of around 5.7% of GDP. This would be expected to moderate in 2022 to 4.9%, as international financial conditions tighten due to the acceleration of monetary policy normalization in the United States and other advanced economies.
  • With this decision, the BDBR has reiterated its commitment to the 3% annual inflation target. The increase in the benchmark interest rate takes into account the current dynamism of Colombia's economy, which has recovered quickly from the effects of the pandemic and no longer requires the same degree of monetary stimulus that has been administered over the course of the COVID-19 crisis."



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