Colombia’s central bank is expected to keep its benchmark interest rate on hold at its monetary policy meeting Friday as the bank keeps its focus on maintaining slow price increases.
The central bank’s key interest rate will stay at 3%, six of the seven economists polled by Dow Jones Newswires forecast. One analyst said that the central bank will slash the benchmark rate by 50 basis points.
An interest-rate cut could help the central bank fight the appreciation of the peso, which has surged nearly 12% this year. “Cutting interest rates could be very effective right now” as authorities struggle with the peso’s strength, said Carlos Ramos, an economist with brokerage firm Interbolsa SA, who predicts a rate cut.
Other economists, however, believe that the central bank is likely to take other measures to contain the peso’s rise, such as capital controls on short-term borrowing abroad by local firms. The monetary authority could also announce it will increase its dollar purchases from the current $20 million daily to drain more U.S. currency from the exchange market.
“The central bank could start buying as much as $40 million daily,” said Daniel Velandia, an analyst with local brokerage Correval SA.
Bank of America Merrill Lynch said it believes the central bank will keep the rate unchanged, but that the bank’s next move could be a rate cut. The low inflation rates and peso’s appreciation, as well as the gap between its benchmark rate and those in developed economies, could push the bank to slash rates again, Bank of America Merrill Lynch said in the report.
The central bank’s main concern remains price increases, which this year have stayed within the lower range of its 2% to 4% target. Consumer prices in September declined 0.14% as a result of drops in food prices. Inflation over the 12 months through September was 2.28%.
The slow price increases are taking place despite faster economic activity. After emerging from a slowdown last year, the Colombian economy picked up speed and grew 4.5% in the second quarter. Finance Minister Juan Carlos Echeverry has said that the gross domestic product could expand 5% this year.
The faster economic growth, however, could have an impact on inflation in the coming months and next year, said Velandia. “The central bank is looking at the inflation outlook for next year and it’s not clear that inflation will remain slow,” he said. “Inflation is always the bank’s priority,” he added.