Analysts from London-based research group Capital Economics believe that Colombia may be forced to continue raising its interest rate in the coming months to combat inflation. The firm believes that another hike of 25 basis points is coming in July, bringing the rate to 7.75%, with “a further hike in August likely.”
This goes against the publicly stated position that Colombian Finance Minister Mauricio Cárdenas, among others, made last month. After the Banco de La República issued a June 22 interest rate increase of 25 basis points — the bank’s tenth consecutive month making a hike — Cardenas told Bloomberg that, “I think the job is done.” He added that “interest rates have reached a fair, suitable level — a level that allows for an ordered adjustment in the economy, including slower inflation.”
But if back-to-back hikes are looming in July and August, as Adam Collins of Capital Economics is predicting, the interest rate will hit 8.0% before the end of the summer. This would mark a rise of 350 basis points in roughly 12 months in a nation where authorities have seen inflation balloon to more than double the 4% threshold on the high end of their target range. “There is little room for policymakers to leave interest rates on hold,” wrote Collins.
Inflation has hit a 16-year high of 8.6% in the Andean country, something that Capital Economics admits “has surprised most forecasters, including ourselves, who had expected it to peak at around 8.0%.” The increase in food prices has been most dramatic, with costs recently hitting a level some 14% higher than they were at the same time in 2015.
The severe El Niño cycle that impacted Colombia in early 2016 has been largely to blame. It has led to lower agricultural yields while pushing up electricity prices. The cost of food and other goods has also gone up due to a now-43-day-old trucker strike that has crippled a large section of the transport network near the capital.
Though there is still no end in sight to the strike, most analysts believe inflation will ease over the rest of 2016. “We expect inflation of 6.2% at the end of 2016 but with an upside bias,” stated BBVA Research in a note to investors in early July.
Capital Economics is also forecasting a turnaround. Though it does see inflation rising to 9.0% before it starts to fall, Collins predicted that “the prices of tradable goods should ease significantly over the coming months.” As a result, he believes the central bank will respond with interest rate cuts beginning in early 2017.