Colombia: Central Bank increases key policy rate further
July 4, 2014
The Central Bank (BanRep) increased its reference interest rate by 0.25 percentage points to 4.00% at its 20 June monetary policy meeting. The decision was in line with market analysts’ expectations and represented the second consecutive rate hike. The surprising decision to raise the reference rate in April was the first change from the 3.25% where the Central Bank had kept the rate since March 2013.
BanRep illustrated the country’s positive economic performance in stating that GDP growth in Q1 was strong and that it was largely driven by domestic demand. The Bank also noted that forward-looking indicators suggest that household consumption remained strong in Q2 and that labor conditions improved over the past months. According to the Bank, these facts suggest that, “demand is growing at a pace that is higher than the potential GDP.”
The Bank pointed out that inflation remained on its upward trend in May. Furthermore it noted that inflation expectations are rising and that, “some are beginning to surpass the midpoint of the target range.” The Bank added that, “[t]he above combined with the record of some expectations of rising inflation increases the probability that inflationary pressure may be spreading throughout the entire economy.”
Concerning the international environment, the Bank said that it expects the United States to recover at a moderate rate in Q2 and noted that growth in the Euro zone has been modest while growth has slowed down in several Latin American countries. Furthermore, the Bank pointed out that, “the performance of commodity prices has been mixed,” and that that exports in USD terms declined on a broad basis in April. The Bank added that the future development of the exchange rate is uncertain due to the irregular behavior of some currencies in the region as well as the potential tightening of interest rates in the United States.
The Central Bank concluded its statement by giving the following three key reasons for its decision to hike the reference interest rate: “(i) the volatility and uncertainty of the data on public investment which has been the main unexpected outcome with respect to growth, (ii) the weakening of international trade, and (iii) the impacts of the monetary policy of the United States.” The next policy meeting is scheduled for 31 July.