Colombia’s central bank increased its benchmark interest rate for a second consecutive monetary policy meeting Friday and said it would continue raising rates in a gradual manner, citing a pickup in economic activity.
The central bank lifted its key rate by 25 basis points, leaving it at 3.5%. The decision was unanimous by the bank’s board members and was widely expected by the market, with all but one of seven economists surveyed forecasting this outcome.
“Economic activity in Colombia continues to gain strength,” central bank chairman Jose Dario Uribe told reporters. “The gross domestic product growth in the fourth quarter of 2010 may be higher than previously expected.”
The decision to lift rates comes on the heels of Colombia securing investment-grade status from rating agency Standard & Poor’s for the country’s foreign debt, a decision that Finance Minister Juan Carlos Echeverry has said proves the government’s macroeconomic and fiscal stability.
The government said the Colombian economy could grow as much as 6% this year, although the central bank’s official projection points to a 4.5% expansion in 2011.
While the bank expects economic activity to continue to increase, helped by rising foreign investment and strong consumer spending, it also warned that there are risks. The bank specifically noted the situation in Japan, saying it adds to ongoing global economic uncertainty.
The bank began raising rates last month amid worries over inflation after a couple months of much-higher-than-forecast readings that were largely due to severe rains in 2010 that cut supplies of food and caused transportation prices to rise.
But February’s consumer price index came in rather low, rising just 0.6% against economists expectations of a 1% rise, which has allayed much of the central bank’s worries. It said Friday the inflation outlook is hovering near the middle of the bank’s target range. The country expects consumer inflation to land between 2% and 4% this year.
The bank also expressed comfort with the peso’s recent performance. The local currency is modestly stronger against the dollar from where it began the year, closing Friday at COP1,873.50 for $1.
The bank has been buying dollars in the spot market since last year in an effort to keep the peso from gaining too much against the greenback. Minister Echeverry, who is also a member of the central bank, said this dollar-buying program will continue but said no new forex measures are planned.
“We believe we have the necessary and correct package of measures,” Echeverry said.
On future rate moves, the bank said they plan to continue to raise rates in a gradual manner, but said they don’t want them to reach the high levels seen in previous years.
“We want to minimize the interest rates that we need to control inflation while maintaining high levels of growth and job creation.” Echeverry said.
The increase in the interest rates could make Colombian assets more attractive and lead to an appreciation of the peso. The rating upgrade, which could lead to higher foreign investment in Colombia, could also spawn a stronger currency.
(Darcy Crowe and Dan Molinski / Dow Jones)
