Colombia’s Central Bank Raises Interest Rate 25 Basis Points In Gambit Against Inflation

Colombia’s central bank moved to tighten Colombia’s money supply yesterday, by raising the benchmark interest rate a quarter of a percentage point to 6.25%. Colombia is facing inflationary pressures due to the precipitous fall of its Colombian peso against the US dollar, falling over 30% in 2015. Even though Colombia’s economy is generally sound, and its monetary policy earning an investment grade from the major bond ratings agencies, Colombia’s exports have been closely tied to petroleum and other commodities, allowing the fall in oil prices to drag the peso down with it.

According to the Banco de La República, the central bank, the annualized consumer inflation rate in January was at 7.45%, and the average between major inflationary measures at 5.73%, exceeding the forecasts of the central bank’s team of analysts. The target inflation rate for the bank remains at 4.5% for the next year, and 3.7% two years out.

Above photo: Banco de la República’s board of directors. Photo credit: Guillermo Restrepo, courtesy Banrepublica

The increase in food prices make up a considerable portion of January’s inflation rate. For example, according to the Fedearroz—the Federacion Nacional de Arroceros (National Rice Growers’ Federation), a kilogram of rice rose 200 pesos in just one month, from $3,264 pesos to $3,451, as reported in the daily La Republica. Aggravating the fall in the peso, Colombia finds itself in the grips of a very strong El Niño climate cycle, which has led to decreased agricultural output, and in much of the country, a severe drought that has led to fatalities in both humans and livestock.

In its statement, Banco de República also cited the following factors:

• Petroleum prices remain volatile, according to the central bank, and will likely to continue to remain lower than historical averages. As investors become more risk-averse, Latin American economies such as Colombia’s will see a risk premium in currency and interest rate spreads.
• Recent data suggests that global economic growth has slowed, reducing demand from Colombia’s major trading partners. Recovery for Colombia’s export markets is expected to be slower in 2016 than previously projected.
• The fall in oil prices has resulted in a precipitous decline in Colombia’s tax revenues, and dividends from state controlled petroleum assets. This has required a decrease in government spending, and an increase in the urgency for fiscal reform. Budget cuts and adjustments to Colombia’s taxation regime are necessary in 2016, according to the central bank, for the economy to adjust to the new government tax-revenue landscape.
• Production has remained constant in the last two quarters of 2015, however net exports for 2015 should register a modest growth of between 2.8 & 3.2%.

Colombia’s consumer confidence index has fallen to historic lows. This has negative implications for household durable goods purchases. Other economic indicators predict an annual growth rate of 2.7%, or within a range of 1.5%-3.2%.