Colombia’s central bank on Friday raised its benchmark interest rate by 25 basis points to 4.25 percent, but analysts detected signals pointing to a pause in the bank’s rate-hiking campaign this summer.
A majority of the bank’s seven-member board voted for the hike, breaking with the board’s consensus stance between February and May, when it raised rates monthly like other South American countries battling to control inflation.
The central bank’s latest rate hike defied President Juan Manuel Santos, who on May 31 asked the bank to not raise rates further, saying to do so would risk slowing economic growth.
Finance Minister Juan Carlos Echeverry, who presides over the board and is a voting member, sidestepped questions on how he voted but said the board’s decision was not unanimous.
Central bank general manager Jose Dario Uribe gave no breakdown of the vote, but said a majority was in favor.
Under Colombia’s constitution, the central bank is autonomous. Besides the finance minister, the president can appoint two of its members and that can happen only midway through his presidential term.
It was not clear what implications the bank’s show of independence would have on the president’s economic policy. Santos began his four-year term last August 7.
In the post-statement press conference, Uribe noted that downbeat economic signs included a surprise fall in public works construction in the first quarter and a decline in consumer confidence.
Economic growth for the first quarter was seen in the “lower part” of the bank’s 3.9 percent to 5.5 projected growth range, following 4.3 percent economic growth in 2011.
Colombia is scheduled to release first-quarter gross domestic product data on Thursday and the result could contribute to the bank pausing its rate-rising campaign next month, wrote Correval, a Bogota brokerage, in a note.
Also relevant was the removal in Friday’s communique of the phrase “less-expansive monetary policy should continue,” present in communiques from February through May.
“This implies that in the next (monetary policy board) meeting there could be a pause, something which depends in large measure on the first-quarter GDP data next month,” Correval said.
In a note, JP Morgan interpreted the monetary policy communique as “dovish,” adding that Colombian interest rate futures market seemed to be pricing in a 25 basis points hike in July, a pause in August and a 50 basis points hike in September.
After the announcement of the central bank rate hike, the government’s DANE statistics agency released data showing a sharp slowdown in industrial growth in April to 2 percent over a year earlier – the weakest in nine months.
In March, industrial production grew 5.2 percent versus the same month last year.
But DANE added that retail sales soared 23.2 percent in April, compared with a year earlier, driven by sales of footwear and leather goods, computer equipment and vehicles and motorcycles.
In March, retail sales rose 14.6 percent.
The retail surge comes amid what the central bank’s Friday statement said was dynamism in household consumption as credit growth outpaced GDP expansion.
The central bank said its inflation projections for 2011 and 2012 remained near the mid-point of its 2 percent to 4 percent target range.
Colombia, one of Latin America’s top five economies, has recouped investment-grade credit ratings from two major ratings agencies so far this year and is attracting strong investment inflows in the mining and oil sectors.
A Reuters poll of 40 economists this week showed an increase in economic growth expectations for 2011 to 5.01 percent versus 4.53 percent in the last survey, but growth was seen slowing next year to 4.88 percent due to a less expansive monetary policy by the central bank.