Colombia’s central bank raised its benchmark interest rate on Friday for the first time in four months and warned it could adjust monetary policy “rapidly” if the global economic crisis impacted the economy.
While Colombia has benefited from a decrease in drug-funded violence and has attracted record investment in oil and mining, policymakers sought to pull monetary stimulus by boosting the lending rate a quarter point to 4.75 percent.
The decision, which was not unanimous, met forecasts by 18 of 35 economists in the latest Reuters poll. Another 15 had expected the bank to hold rates steady, while two saw a half-point hike.
“The biggest risk to inflation comes from excessive increases in demand,” said bank general manager Jose Dario Uribe after announcing the decision. “The biggest risk to growth forecasts is disorderly adjustments in Europe.
“The decision incorporates the possibility of detecting in time any substantial change in external economic conditions and being able to react rapidly,” Uribe said.
The decision bucked a trend among central banks in Latin America to hold or cut rates on concerns that Europe’s debt crisis will slow global growth and harm domestic economies.
Brazil has trimmed borrowing costs twice since August. Peru, Chile and Mexico have hinted they may follow suit.
Colombia’s vote followed five hours of discussion focused on cooling the pace of lending, which has encouraged consumers to spend on big-ticket items like cars and real estate, pushing annual inflation to its highest in two and a half years.
Consumer price gains last month reached 4.02 percent, above the bank’s goal of 2 percent to 4 percent for this year.
Policymakers also measured the impact Europe’s debt crisis could have on Colombia’s economy, Latin America’s fourth-biggest, as well as moderate growth in the United States.
“The bank needed to strike a balance between local and international risk,” said Alejandro Reyes, chief economist at Bogota-based Ultrabursatiles before the rate decision.
“External risk that caused the bank to hold the rate last month is still uncertain; that hasn’t changed.”
Brazil’s central bank chief, Alexandre Tombini, said late on Thursday the “substantial” worsening of the economic outlook abroad, even without an extreme shock, supports “moderate adjustments” in interest rates.
Colombia’s economy has reaped the dividends of improved security as government troops battle insurgent groups like the Revolutionary Armed Forces of Colombia, known as the FARC, leaving the drug-funded rebels in disarray.
“It’s all about uncertainty going into next year,” said Munir Jalil, chief economist at Citibank in Colombia. “We’re likely to see the rate going to 5 percent this year. But if Europe worsens and the U.S. gets flu and sneezes, then everyone gets sick and we could see the bank cutting to 3.5 percent next year,” he said.
The bank set an inflation target for next year of between 2 percent and 4 percent
The economy may grow as much as 5.5 percent in 2011 after expanding 4.3 percent in 2010, according to Finance Minister Juan Carlos Echeverry. Expansion next year will be between 4.5 percent and 6 percent, he said this month
Colombian President Juan Manuel Santos expressed concern that a downturn in the world economy could impact Colombia, telling an investment summit in London this week “we are very worried that eventually it will touch us.”
The European crisis has helped stem gains in the peso as investors lose appetite for riskier assets. Economic growth and record investment boost the value of the currency against the dollar, creating problems for exporters, who complain they earn fewer pesos for their dollar-denominated sales.
Some exporters have threatened lay-offs.
The bank last month re-established its program to reduce volatility in the forex market through auctions of dollar put and call options when the peso fluctuates 4 percent above or below a 20-day moving average.