Colombia may raise rates to fight inflation

Colombia’s central bank holds its monthly monetary policy meeting Friday, and while most analysts believe the bank will increase its benchmark interest rate for the first time in four months to control inflation, others expect the bank to again leave rates unchanged.

In a brief survey by Dow Jones Newswires, four of six analysts polled said the bank’s board will likely lift rates by 25 basis points to 4.75%. The other two analysts polled said the bank is likely to hold rates steady at 4.5% because they say there remains high uncertainty over how the global economic slowdown is affecting Colombia.

“This rate decision will definitely be a close call,” Felipe Hernandez, an analyst at RBS and one of those who believes the bank will hike rates.

Hernandez says a key argument for the bank to increase borrowing costs is that the “external contagion,” from factors such as Europe’s debt crisis and signs of slower global growth has had a limited impact on Colombia due to the positive domestic stimulus from low interest rates and high credit growth that comes with “expansive monetary conditions.”

Indeed, data out this week showed Colombia’s economy is still humming along nicely. Industrial production rose 5.3% in September on the year, while retail sales for that month climbed 8.1% on the year. Both figures were slightly lower than the previous month, suggesting that the local economy is starting to decelerate, but the trend of healthy growth remains.

Also supporting a rate hike are growing concerns over inflation. Annual consumer prices hit 4.02% at the end of October, its highest level in a few years and outside the central bank’s wide target range of 2% to 4%. By raising borrowing costs to limit consumer spending, the bank would show that it takes seriously its mission to nip inflation in the bud.

However, Daniel Velandia, an analyst at Correval brokerage in Bogota who is among those who expect the bank to leave rates steady Friday, sees things differently. He says this week’s sharp drop in stock markets around the globe will likely force the bank’s hand, resulting in a decision to hold rates unchanged.

Stock markets were sharply lower Wednesday, fueled in part by the preliminary HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity. It fell to 48.0 in November from a final reading of 51.0 in October. Readings below 50 imply contraction, and could suggest a sharper global economic slowdown is on the horizon.

“The central bank is watching the global picture unfold day to day,” Velandia said. “And this week’s performance puts at risk the view that Colombia’s not going to be hurt by global factors.”

If the bank is worried that the international situation is getting ready to start damaging Colombia’s economy, it may decide to hold rates steady.

Related posts

Colombia’s Senate agrees to begin decentralizing government

Colombia’s truckers agree to lift blockades after deal with government

Truckers shut down parts of Colombia over fuel price hikes