Despite back-to-back interest rate hikes by Colombia’s central bank, economic growth is accelerating with inflation within targets, reported US news service Bloomberg.
The board of Colombia’s central bank, Banco de la Republica, voted unanimously on Friday to cut back stimulus and increase their key interest rate to 3.75%.
Central bank rate hikes generally make it more expensive to borrow money and this usually means people are less likely to spend freely. This consequently limits the rate of inflation, the increase in price of goods and services over time.
Friday’s 0.25% rise follows an equivalent hike in April, placing interest rates at their highest level since January 2013 according to international news source, Reuters.
Economic growth has been gathering momentum over the last year and estimates for the first quarter are almost double what was predicted for the same period in 2013. Colombian government forecasts pin this year’s growth rate at 4.7%, up 0.4% from 2013, amid two interest rate rises in as many months. The figures are released amid record-low unemployment in April and a jump in inflation expectations.
Inflation on target
The central bank’s statement suggests that prices within the economy are rising on target, fueled by Colombian households’ spending.
The bank’s decision was based on the stability of the Colombian economy and on-target inflation predictions, said Banco de la Republica Governor, Jose Dario Uribe, quoted in US newspaper the Wall Street Journal (WSJ).
“A gradual adjustment in the expansive monetary policy reduces the need for brusque changes in the future, and ensures macroeconomic stability.”
This is good news for Colombian families, Finance Minister Mauricio Cardenas commented following the announcement: it should mean “more income, more employment and a higher quality of life”.
Analysts at the Corporacion Financiera Colombiana predict further rises in the interest rate this year as growth pushes the economy close to its full capacity and inflationary pressures mount, reported Bloomberg.
One of the fastest growing economies in Latin America
Banco de la Republica is currently the only major central bank in Latin America without a looming threat of inflation to contend with. But that is likely to change in the coming year, according to analysts quoted by Reuters.
Colombia’s growth rate is due to accelerate for a third consecutive year, amid predicted lags in the major economies of its neighbors Brazil, Peru, Argentina, Chile and Venezuela.
President of the Colombian Society of Economists, Lilia Beatriz Sanchez told Colombia Reports on Tuesday that Colombia’s “clear democratic process,” “strong economic fundamentals,” and international faith in its “dedication to the rule of law” are what sets it apart from other major Latin American economies.
However, the future of Colombia’s economy depends significantly on the outcome of round 2 of presidential elections in June. Reuters reported that analysts wait to see whether the country will abide by the economic policies of incumbent Juan Manuel Santos, or leading rival Oscar Ivan Zuluaga.
- Interview with Lilia Beatriz Sanchez (Colombia Reports)
- Colombia central bank statement on interest rate decision (Reuters)
- UPDATE 2-Colombia central bank raises interest rate 25 basis points (Reuters)
- Colombia Lifts Key Rate to 3.75% as Inflation Estimates Jump (Bloomberg)
- Colombia Raises Key Interest Rate by 25 Basis Points to 3.75% (Wall Street Journal)