The Colombian central bank’s decision to unexpectedly increase its key lending rate in its monetary-policy meeting last month was triggered by concerns over inflation and a surge in credit, minutes from the meeting show.
The central bank decided in its Jan. 30 meeting to raise its benchmark rate by 25 basis points to 5%, surprising most observers who had predicted the bank would keep the key rate in check.
In the minutes from the meeting, the bank said it gave “more weight to the internal conditions of the economy” while continuing to warn the economic situation overseas remains a major concern. The bank noted it remains worried over the situation in Europe, where “doubts arising on the solvency of certain banks continue to affect household and entrepreneur confidence.”
The bank said “recession in Europe is likely to be worse than anticipated months ago” and the main risk to “growth forecasts continues to be a disorderly adjustment in Europe.”
“Should this risk materialize, the world economy would grow considerably less than expected, the international prices of basic goods may fall, and global risk aversion may be exacerbated, all of which would have adverse effects on the Colombian economy,” the central bank said.
The central bank noted Colombia’s economic performance remains solid. After the economy expanded by 7.7% in the third quarter, the central bank said the Colombian economy “continued to show strong dynamism in the fourth quarter.” 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 bank said households are increasing their degree of indebtedness in a significant manner while inflation expectations continued to climb. “The main risk on inflation comes from excessive expansions in demand or increases in costs above those expected, with hard and lasting effects on monetary policy expectations and credibility,” the bank said.
Taking those factors into account, the bank’s seven-member board voted unanimously to raise the key lending rate. One board member “deemed appropriate to supplement the rate increase with some kind of macro-prudential measure aimed at accelerating the interest rate transmission on consumer credit dynamics.” The minutes didn’t specify what type of mechanism could be implemented.