The Central Bank of Colombia may raise its benchmark lending rate for a second straight month at its Friday meeting, a decision that would be spurred by fears that a boom in consumer credit could jeopardize the bank’s efforts to limit inflation.
A poll of nine analysts by Dow Jones, however, also showed that economists are deeply divided over their projections for the outcome of the Friday monetary policy meeting. Five analysts forecast that the central bank will increase its key rate by 25 basis points to 5.25%, while four of them expect the bank to keep the rate in check.
The split in the projections comes after the central bank surprised the market by increasing its key rate by a quarter of a percentage point to 5% at its January meeting while the bank’s observers overwhelmingly projected a hold decision.
Bank of America Merrill Lynch said in a research note that the market was surprised with the timing of the central bank’s decision to increase, rather than the move toward a more restrictive monetary policy. Bank of America said it expects the central bank to keep on hold its key rate at the Friday meeting and to carry out one more rate increase in March.
If the central bank increases further, “it runs the risk of overshooting its target and forcing an economic contraction,” Bank of America said.
The central bank’s seven-member monetary policy board has shown that it is largely focused on controlling inflation and that some of its members consider the current rate as expansionary.
The Colombian economy has been posting strong growth numbers and for all of 2011, the bank expects the economy to have expanded more than 5.5%. For 2012, its projection is for the economy to expand between 4% and 6%.
The central bank has cited inflationary pressures and the boom in consumer credit as the main factors behind its decision to increase its benchmark rate in January. Consumer prices were up 3.54% in the 12 months through January, within the central bank’s target range of 2% to 4%.
The bank’s last rate increase was a unanimous decision, but at least in this occasion there may be more division in the bank’s monetary policy board. Finance Minister Juan Carlos Echeverry said in a recent interview that inflation pressures were easing, a signal that he may not support a new rate increase at this time.
“I was worried about inflation and we raised rates,” Echeverry said.
“Inflation expectations have now gone down and in the next meeting we’ll probably see that inflation pressures are not as strong as before. … Inflation will move in the right direction in 2012 and I think the worst is over,” he added.