Colombia’s Central Bank Raises Interest Rate by 25 Basis Points to 7.75% to Curb Inflation

Colombia’s central bank today raised the interest rate by 25 basis points to 7.75%. This marks the 11th consecutive month that Banco de la República has intervened in a fight against ballooning inflation, setting another seven-year high for the nation’s borrowing cost. This rate raise comes despite Finance Minister Mauricio Cárdenas telling the press last month that he believed “the job is done.”

In addition to inflation, the bank said that raising the rate yet again was prudent due to weak global economic growth, low oil prices, and the increased probability of monetary policy tightening in the United States later this year.

Banco de la Republica has also lowered its most-likely growth projection for the economy in 2016. It is now expecting a 2.3% GDP expansion this year compared to its previous 2.5% projection. The International Monetary Fund recently maintained its 2.5% forecast. Bancolombia‘s most recent prediction is 2.6% while the United Nations Economic Commission for Latin America and the Caribbean is the most optimistic with a 2.7% forecast.

(chart via Trading Economics)

The primary goal of the rate increase is to curb an inflation rate that hit a 16-year high of 8.6% in June. Food prices, in particular, have spiked amid a weak peso, El Niño-related drought, and a trucker strike that disrupted shipments for more than six weeks. While both the weather phenomenon and the labor dispute have ended, and thus inflation is expected to fall sharply later this year, the ramifications are still impacting the price of food and consumer goods.  “The effects of the trucker strike on consumer prices will be felt in July but are expected to quickly fade,” said the central bank in a statement.

After raising the rate in June, Finance Minister Cárdenas was optimistic that the bank would not have to make further adjustments this summer. “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.”

This statement came before figures showed a month-to-month inflation jump from 8.2% to 8.6%, however. Following that revelation, several analysts predicted that the central bank would be forced to make another rate increase. Bancolombia expected today’s action, and Capital Economics, an analyst group in London, predicted both today’s intervention and another 25 basis point increase in August that will push the interest rate to 8.0%.

While Capital Economics expects inflation to finish 2016 down significantly, it foresees a high of 9.0% before it starts to fall. Spanish bank BBVA recently projected inflation to end the year at 6.2%.

The Banco de la República’s long-term forecast, looking one and two years out, projects inflation to stabilize at 4.6% and 3.7%, respectively. The central bank’s target rate is between 2%–4%.