Colombia’s central bank will likely keep its benchmark interest rate at a record low after the economy slowed and may indicate readiness to raise borrowing costs as soon as March to damp rising inflation expectations.
The seven-member board, led by bank chief Jose Dario Uribe, will keep the overnight rate at 3 percent, according to all 27 economists surveyed by Bloomberg. Given the consensus, investors will focus on the statement accompanying the decision, scheduled for after 11 a.m. New York time.
Policy makers last month said the economy may expand less than previously anticipated while also noting a rise in inflation expectations due to supply disruptions caused by the heaviest rains in three decades. Still, the $231 billion economy is likely to pick up in the second half of 2011 on spending to repair flood-damaged infrastructure. The bank had forecast 4.5 percent economic growth in 2010 and 2011.
“The bank really should start raising the rate now, but it likely will wait for year-end data before it takes action,” said Julian Marquez, an analyst at Bogota-based Interbolsa SA, Colombia’s biggest brokerage.
Since the bank’s Dec. 17 meeting, the national statistics agency reported that South America’s fourth-biggest economy slowed for a second straight quarter for the first time since 2008.
At the same time, annual inflation last month quickened to a 15-month high of 3.17 percent, up from 2.57 percent a month earlier. Economists surveyed by Bloomberg forecast a 2.78 percent year-on-year increase.
Demand, Credit
The economy, driven by consumer demand and private investment, attracted about $6.5 billion in foreign direct investment through the third quarter of 2010, on top of $7.2 billion in 2009 and a record $10.6 billion in 2008, according to the central bank.
Total gross lending rose 16 percent to 174 trillion pesos ($93 billion) in November from a year earlier, according to a report last month by the financial regulator.
Retail sales surged 21.4 percent in November from a year earlier, while industrial output picked up 4.5 percent. Car sales rose almost 32 percent over the same period.
“Credit is increasing strongly, inflation is up, retail sales are soaring and so is industry, so the country is ready for a rate raise,” said Marquez.
Diego Donadio, Latin America strategist at BNP Paribas in Sao Paulo, expects a “more hawkish tone” from policy makers today regarding rising consumer prices and domestic demand, “preparing the scene for a hike in March.”
Floods, Spending
The rains, which flooded more than 1 million hectares of farmland and killed over 300 people, boosted prices of some produce as farmers were forced to harvest early and had trouble getting their goods to market.
After infrastructure investment of about 50 trillion pesos ($26 billion) in 2009, which was aimed at pulling Colombia out of its first recession in a decade, public works spending in the third quarter of last year fell 17.7 percent.
That is likely to rebound this year as the government spends about 14 trillion pesos to repair roads and provide humanitarian aid to flood victims.
President Juan Manuel Santos issued a slew of decrees aimed at raising money to pay for the damages. He raised taxes on high-income wage earners and accelerated plans to sell a stake in state oil company Ecopetrol SA.
Peso Outlook
Policy makers may also take into account the effect of the peso’s appreciation on consumer demand.
The currency has gained 8.9 percent against the dollar in the last month, the best performance among 25 emerging market currencies tracked by Bloomberg worldwide.
The peso, which closed at a 26-month high of 1,786.50 per dollar on Oct. 11, may extend its current rally “to trade closer to the 1,800 level and finish the year at around 1,850,” according to a Jan. 28 Bank of America-Merrill Lynch research report.
Earlier this month, Joydeep Mukherji, senior director of Latin American sovereign ratings for Standard & Poor’s, said Colombia may be the next Latin American country to be raised to investment grade, helping push down yields on peso bonds to a seven-week low.
In Jan. 29 trading, the yield on benchmark 11 percent bonds due July 2020 rose two basis points. or 0.02 percentage point, to 7.94 percent, while the peso fell 0.2 percent to 1862.20 per dollar.
‘It’s All Temporary’
Policy makers last month noted that inflation, while higher than expected, remains low and within the target of 2 percent to 4 percent set by the bank for both 2010 and 2011.
“The core inflation indicators (which exclude the prices of the most volatile products such as food) rose slightly and remain close to or below the mid-point of the target range,” policy makers said Dec. 17.
According to the average forecast of 45 economists in a central bank survey this month, inflation will close 2011 at 3.57 percent. For January, the same survey shows economists see consumer prices rising 0.88 percent this month, after a 0.65 percent increase in December.
“Although inflation expectations have risen, it’s short term because of the supply shock caused by the flooding; but it’s all temporary,” said Katia Diaz, an economist at 4Cast Inc. in New York. “We don’t expect the temporary supply shock to alter the path of monetary policy.”