Colombia’s inflation rate has been well above the government’s target range of 2%-4% since it began to skyrocket in August 2015. But the May rate of 8.2% represents the highest rate seen in the nation since 2001 and is now testing “Colombia’s commitment to preserving the credibility of its inflation targeting regime,” says Fitch Ratings.
The central bank in Bogotá — Banco de la Republica — has been on the offensive to keep inflation in target. On May 27, it raised interest rates another 25 basis points to 7.25% and has now hiked the rate by 225 basis points since last September. Fitch expects the central bank to remain focused on inflation control.
Prior to the spike in inflation over the past year, which has been attributed to plunging oil prices and rising food prices, monetary policy in Colombia has largely kept the rate in line with the government’s target.
Fitch noted the nation’s “track record of targeting inflation, its flexible exchange rate and its healthy banking system.”
The ongoing rise, however, is troubling. Along with inflation, consumer prices were 7.9% higher in April than at the same time in 2015, another factor in the central bank deciding to raise the interest rate again when it met in May.
“Inflation has accelerated on account of the depreciation of the peso, El Niño, and by the activation of some indexation mechanisms,” said the board in a statement. “In this environment, the response of the monetary policy must acknowledge that the shocks which have affected prices are transitory, while being oriented to ensure convergence of inflation to the target of 3.0% ±1 percentage point in 2017.”
The board also said it “reaffirms its commitment to keep inflation and inflation expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.”
Last week, at an financial conference in Bogotá hosted by the Council of the Americas, “Colombia in the Eyes of Wall Street,” Citi’s Munir Jalil, was optimistic about inflation normalizing in the short term. He said that, due to converging food prices, Citi expects inflation to come down by the end of the year.
Photo: Central Bank headquarters, Banco de la Republica, in Bogotá (Credit: momentcaptured1)