Colombia’s central bank Friday held its benchmark interest rate for an eighth consecutive month, citing slow price increases, but also warned that devastating rains are starting to push up food prices.
The central bank said after its last monetary policy meeting of the year that it was keeping its key interest rate at 3%, a historic low. The decision was widely expected by the market, with all seven economists polled in a Dow Jones Newswires survey forecasting such an outcome.
Jose Dario Uribe, the central bank chairman, said the bank “underestimated the impact the rains would have on prices. “The price increases for food are going to continue over the coming months, but the effects will be temporary,” he said.
The bank also said it expects gross domestic product growth this year to end at between 4% and 4.5%, and said next year’s inflation rate should end at 3% or lower.
Deadly rains lashing the country have damaged food crops, pushing prices higher for several food items. Correval, a local brokerage, estimates that the increase in food prices is likely to continue over the coming weeks.
The low inflation readings of the last couple of months have been the result of a slow increase in food prices, which represents 28% of the inflation basket.
RBC Capital Markets said in a research note Thursday that the central bank will “act preemptively to ensure fiscal stability” and that it could raise interest rates by 75 basis points in the second half of 2011.
Inflation remains anchored at the lower end of the central bank’s target range of 2% to 4%. Inflation for the 12 months through November stood at 2.59%.
The bank started its cycle of rate cuts in December 2008, when its benchmark rate stood at 10%. The expansionary monetary policy was a response to an economic slowdown, with the Colombia’s gross domestic product growing a lackluster 0.8% in 2009. The economy has recovered this year, with second-quarter GDP growth coming in at 4.5%, the fastest pace in two years. (Darcy Crowe / Dow Jones Newswires)