Bloomberg News

Colombia May Raise Rate to 4.75% on Above-Target Inflation

November 25, 2011

(Updates survey in second paragraph

Nov. 25 (Bloomberg) -- Colombia’s central bank may raise borrowing costs today after a lending boom and the fastest economic growth since 2007 pushed inflation over policy makers’ target.

The seven-member board, led by bank chief Jose Dario Uribe, will increase the overnight rate by a quarter point to 4.75 percent, according to 18 of 35 economists surveyed by Bloomberg. Seventeen analysts expect the bank to leave the rate unchanged. Banco de la Republica will probably announce its decision after 1 p.m. New York time.

Policy makers in a split decision last month voted to keep the rate at 4.5 percent for a third consecutive time, as the majority argued for the need to take “into account those external factors that reflect higher risks and uncertainty,” according to the minutes of the meeting. Since then, inflation rose above the upper limit of the bank’s target range for the first time in more than two years, raising the odds for what would be the South America’s first rate increase since July.

“The Colombian economy doesn’t need further stimulus,” said Andres Pardo, the head analyst at financial services holding company Corp. Financiera Colombiana, known as Corficolombiana. “The central bank needs to raise interest rates to a neutral level or run the risk of allowing inflation expectations to become unanchored.”

At the bank’s Oct. 28 meeting, policy makers noted low interest rates had helped drive the economy’s “very dynamic” internal demand, rapid loan growth and record housing costs.

Inflation Expectations

According to the central bank, Latin America’s fifth- largest economy may grow as much as 6 percent in 2011, the fastest expansion since the 6.9 percent pace achieved in 2007.

Annual inflation quickened to 4.02 percent in October, above the central bank’s 2 percent to 4 percent target range for this year.

The gap between yields on government inflation-indexed bonds due 2015 and similar-maturity fixed-rate debt, a gauge of annual consumer price increase expectations known as the breakeven rate, jumped 36 basis points in the past month to 3.93 percentage points.

That compares to a 25 basis-point decline in Brazil’s breakeven rate and a 15 basis point increase in Mexico’s gap in the same period. Brazil has cut borrowing costs twice since raising the Selic on July 20, and central bankers in Mexico, Chile and Peru signaled they may do the same.

Rate Horizon, Dilemma

It’s “highly probable” that inflation will end this year at 3.5 percent, Uribe said Nov. 11. While quickening inflation in the last few months is mainly due to an increase in food prices, as higher-than-average rainfall hurts crops and chokes off farmers’ supply routes, inflation should slow to about 3 percent in 2012, he said.

Colombia’s three-month interest-rate swaps at 4.62 percent, down from 4.65 percent on Nov. 21, show traders remain uncertain about the outlook for an interest rate increase this year, according to data compiled by Bloomberg.

The interest-rate swap reflects traders’ views of the likely average of future benchmark rates during the life of the contract.

“The market is really divided for this meeting,” said Francisco Chaves, an analyst at brokerage Corredores Asociados SA in Bogota. “It’s a very hard call. Given current conditions, the world has focused on growth and not inflation.”

Europe, Moderation

Slowing growth abroad will lead Colombian policy makers to leave the benchmark interest rate unchanged at 4.5 percent through year-end, according to Carola Sandy, an economist with Credit Suisse Group AG in New York.

“With Europe slipping into recession and Brazil already showing signs of a significant slowdown, we think the global growth outlook and the uncertainly about the future performance of the Colombian economy will be (and should be) the central bank board’s main concerns in Friday’s meeting,” Sandy wrote in a Nov. 21 report.

The Andean nation’s economic growth will slow to 4 percent in 2012 from 5 percent this year, Sandy forecasts.

Colombia’s “leading indicators point to some moderation in activity in the second part of the current quarter and in the months ahead,” Sandy wrote.

Retail sales rose 8.1 percent in September from a year earlier, after jumping a record 23 percent in April. Industrial output gained 5.2 percent in September after a 9.7 percent jump a month earlier.

Total lending leaped 23.4 percent to 204.73 trillion pesos ($105.8 billion) in September, up from 165.92 trillion pesos in the same month a year earlier. It was the seventh straight month that year-on-year lending rose faster than 20 percent.

“Considering the potential inflation risk in the months to come” and the “still strong dynamism of the economy,” Banco de la Republica will raise the overnight rate by 25 basis points this week, Alejandro Arreaza and Alejandro Grisanti, Latin America analysts at Barclays Capital Inc. in New York, said in a Nov. 21 report.

--Editors: Robert Jameson, Philip Sanders

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net. Blake Schmidt in Bogota at bschmidt16@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net.


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