Colombia’s central bank is expected to increase its benchmark interest rate in its next monetary policy meeting on Friday to squash persistent fears of faster inflation.
A survey by Dow Jones Newswires showed that six of the seven analysts polled project that the central bank will raise its rate by 25 basis points, leaving it at 3.5%. During the last monetary policy meeting, the central bank’s board surprised analysts by raising the rate by 25 basis points, the first increase in nearly ten months.
The central bank suggested that it would continue to gradually increase its benchmark rate this year. Alberto Ramos, an economist with Goldman Sachs, expects the central bank to engage in gradual rate increases over the coming monthsthat would place the benchmark rate at 4.5% for the end of 2011.
Inflation accelerated in the last few months of 2010, propelled by torrential rains that damaged crops and pushed food prices higher. “The risk of higher food prices is still the key factor and that has not changed since the last meeting in February,” said Daniel Lozano, an analyst with local brokerage firm Serfinco SA.
Agriculture Minister Juan Camilo Restrepo warned last week that Colombia could be entering another season of heavy rains that could damage croplands. Restrepo said that 14% of Colombia’s farmland had been affected by the rains and that the process of recovering those lands in some cases would be very slow.
Food prices are a decisive component in Colombia’s inflation index, accounting for 28% of the consumer price index (CPI). The central bank has dismissed the surge in food prices as temporary and has instead focused on surging domestic demand and rising bank loans to explain its decision to hike rates.
Inflation gave signs of slowing in February when CPI rose 0.6%, below the market consensus that projected a 1% increase.For the last 12 months inflation stands at 3.17%, within the central bank’s target range of 2% to 4%.
The central bank moved to increase its key rate even as it remains uncertain about the level of economic growth that Colombia could see in 2011, the bank suggested in its minutes for the last meeting. The central bank expects the economy to grow 4.5% in 2011 while a similar figure is also estimated for last year.
The milder price increases in January are likely to push the central bank to keep on hold its benchmark rate on Friday, says Julian Marquez, an economist with local brokerage Interbolsa SA. Marquez expects the central bank to resume the rate hikes at a later meeting to close the year at 4.5%.
The rising global uncertainty spawning from the devastating tsunami that struck Japan could also push some members of the board to move to postpone any rate hikes, said Munir Jalil, the chief economist at Colombia’s Citigroup unit. Jalil still expects that the central bank will hike interest rates by 25 basis points, but warned that the chances that the rate could remain on hold in the next meeting have increased in the last few days.
If the bank does decide to keep the rate on hold it could risk sending out mixed signals to the market, Celfin Capital, an investment firm, said in a research note. Celfin also expects the central bank to increase its rate by 25 basis points on Friday.