Colombia Raises Benchmark Interest Rate for 10th Straight Month to Fight Inflation

To fight the highest inflation Colombia has seen in 15 years, the nation’s central bank raised its benchmark interest rate, up 25 basis points to 7.5%, for the tenth consecutive month. After the June 22 move, Finance Minister Mauricio Cárdenas suggested this may be the final increase, however, as the monetary policy adjustments made thus far will counteract spiking consumer prices.

“I think the job is done,” said Cárdenas, according to Bloomberg. “Interest rates have reached a fair, suitable level — a level that allows for an ordered adjustment in the economy, including slower inflation.”

Though inflation his 8.2% in May, Colombia’s central bank, Banco de la República, noted that the average of core inflation indicators fell to 6.3%. “Analysts’ inflation expectations to one and two years posted at 4.4% and 3.7%, respectively,” said the bank in a statement.

In addition to the underlying economic fundamentals, the bank believes the adjustments made to the interest rate can reign in inflation back to the government’s target band of 2%–4% in 2017. Falling oil prices, the subsequent peso devaluation, and a difficult El Niño season were credited as the top reasons for inflation climbing so high..

“The Colombian economy continues adjusting in an orderly manner to the strong shocks recorded since 2014,” said the bank. “The current account deficit is correcting gradually, and the risk of an excessive deceleration of domestic demand remains moderate. Inflation has accelerated because of the depreciation of the peso, El Niño, and by the activation of some indexation mechanisms.”

In addition, Banco de la República highlighted that Colombia’s current account deficit in the first quarter of 2016 was $3.38 billion USD, or 5.6% of GDP. This was below the projected sum.

The bank also maintained its previous GDP prediction for 2016. It continues to forecast economic growth between 1.5% and 3.2%, calling 2.5% “the most likely figure.”

(Photo: Colombian Finance Minister Mauricio Cárdenas speaks at a recent World Economic Forum event in Medellín. Credit: World Economic Forum / Benedikt von Loebell)