Colombia’s central bank expected to keep key rate on hold

Colombia’s central bank is widely expected to keep its key interest rate on hold during its monetary policy meeting Monday as policymakers remain concerned over the sovereign-debt crisis in Europe and its impact on the local economy.

The central bank will likely keep its key interest rate in check at 4.75%, all seven analysts polled by Dow Jones projected. If accurate, a hold decision would represent the second straight month that the central bank leaves its benchmark rate unchanged.

Despite the consensus expectation for the next meeting, most analysts project that the central bank will probably hike its interest rate in the coming months. Fears that inflation could spiral beyond the central bank’s target range of 2% to 4% could spur the bank’s rate hikes, analysts said.

“The current rate is not in the central bank’s comfort zone,” said Nader Nazmi, an economist with BNP Paribas. While projecting a hold decision for the next few meetings, Nazmi expects that the central bank could start increasing rates in April.

Central bank chairman Jose Dario Uribe, in an interview with Dow Jones last week, said the bank would concentrate on reducing inflation, which last year stood at 3.7%, the higher end of the bank’s target range. “The bank is focused on keeping inflation and inflation expectations near the middle point of its target range,” Uribe said.

Inflation has accelerated as consumer demand in Colombia is booming thanks to a strong economic performance. The country’s gross domestic product expanded 7.7% in the third quarter of 2011 and could grow as much as 6% for all of 2011. The central bank expects the economy to grow around 5% this year.

The central bank has had to juggle its concerns over inflation with fears that the European Union will not be able to reach an orderly solution to the sovereign-debt woes of some of its member countries.

Analysts will also be watching closely for any comments by the central bank on its foreign exchange measures. The peso has appreciated nearly 7% against the dollar in January and some exporters are calling on authorities to take more forceful measures to curb the peso’s strength.

The government, however, has kept away from any limits on foreign investment, the main driving force for the peso’s strength. Its strategy now consists of purchasing currency options to buy or sell dollars only when the peso rate fluctuates more than 4% from 20-day moving average.

Julian Marquez, a foreign-exchange analyst with Bogota-based brokerage Interbolsa SA, said the central bank was still comfortable with current exchange rate, which on Wednesday stood at COP1,815.75 to the dollar from COP1,814.00 a day earlier.

“The central bank is not likely to move yet to try to halt the peso,” he said.

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