Colombia’s central bank is widely expected to keep its key interest rate at a historic low for a tenth consecutive month as a recent surge in inflation is seen as the result of a temporary shock from spiking food prices.
The central bank will hold its benchmark rate at 3% during its next monetary policy meeting on Friday, all but one of the seven analysts surveyed by Dow Jones Newswires said. The survey showed analysts expect the central bank to wait at least until March to carry out any increases in its benchmark rate.
The central bank’s seven-member board suggested in its last meeting that it could start to raise rates if inflation moves higher than its 2% to 4% target range for the year or if economic growth continues to match the official projections of an expansion of at least 4%.
Inflation has accelerated in the last months as a result of torrential rains that swamped large farmlands, pushing food prices higher. More recently, a two-week strike by truck drivers that ended Feb. 18 hampered food supply in some areas of the country, something which could have spawned price hikes.
Food prices are a decisive component of the consumer price index in Colombia, representing 27% of the inflation basket. Twelve-month inflation stands at 3.40%, its highest since June 2009.
The recent increase in food prices, however, “was only a temporary shock,” said Jairo Lastra, an analyst with Bogota-based brokerage Proyectar Valores. “The central bank has to make decisions on long-term projections and this is a short-term phenomenon,” Lastra said to explain his forecast that the central bank will hold its rate steady.
The central bank will delay any increase in its interest rate, possibly until the second half of 2011, to keep the peso from strengthening further, Lastra said. A higher interest rate could generate more capital inflows into Colombia, raising demand for pesos and strengthening the currency. “The central bank wants to avoid a strong peso,” Lastra said.
Julian Marquez, an economist with Interbolsa SA, Colombia’s largest brokerage, estimates the central bank will increase its benchmark rate 25 basis points, prompted by the higher inflation outlook. “Consumer credit is increasing drastically and the inflation outlook is worsening,” Marquez said.
The Colombian central bank’s monthly survey of inflation shows analysts are expecting inflation to accelerate in 2011 and close the year at 3.61%.
Darcy Crowe / Dow Jones Newswires)
