Colombia raises rate 4th time, inflation forecast raised

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      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.

     www.CentralBankNews.info