Colombia Hikes Interest Rate to 24-Year High to Tame Inflation Spike

Colombia’s central bank continued its steepest-ever interest rate hike cycle despite signs of a sharp economic slowdown as it battles the country’s fastest inflation in nearly a quarter century.

(Bloomberg) — Colombia’s central bank continued its steepest-ever interest rate hike cycle despite signs of a sharp economic slowdown as it battles the country’s fastest inflation in nearly a quarter century.

The seven-member board lifted its benchmark rate by 25 basis points to 13% on Thursday, governor Leonardo Villar told reporters after the bank’s meeting in Bogota. The move was forecast by 20 of 28 analysts surveyed by Bloomberg, while the rest expected an even bolder increase to 13.25%. 

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The unanimous decision takes the interest rate to its highest level since Colombia implemented its inflation-targeting strategy in 2000. But it is also expected to be one of the last increases in the bank’s 11.25 percentage-point tightening cycle, which began in late 2021. Economists surveyed by the central bank forecast that rate hikes will end at 13.25% after the next decision meeting in a month.

“The inflation rate is approaching its ceiling, from where it would start its expected descend for 2023,” Villar said, reading the board’s statement. “Economic activity continues characterized by an important slowdown.”

The central bank also increased its growth forecast for Colombia’s economy to 0.84% from a previous 0.2% for 2023, Villar said, after a 7.5% expansion last year. The change was in part due to revisions made by the statistics agency on previous growth figures, he said.

Next decisions by the central bank will depend on available new information, according to the statement, leaving the door open to additional rate increases. Finance Minister Jose Antonio Ocampo, who takes part in the monetary policy committee, told reporters that if inflation slows in March, policymakers may stop the tightening.

Colombia’s central bank “will wait until actual inflation begins to converge to really entertain rate cuts,” said Alvaro Vivanco, head of emerging market strategy at Natwest Markets. “This should delay the pricing of easing currently priced in the local curve.”

Read More: Colombian Bonds Will Get a Major New Buyer, Finance Chief Says

Colombia and Mexico are home to the only top inflation-targeting central banks in Latin America that are still raising borrowing costs after the region moved aggressively to tighten monetary policy in an attempt to tame price gains triggered by the recovery from the Covid-19 pandemic. Banxico, as the Mexican central bank is known, is expected to boost its key rate by 25 basis points later on Thursday, according to 27 of 28 economists surveyed by Bloomberg.

The Andean nation’s annual inflation rate of 13.28% in February, the fastest since 1999, has accelerated driven by food and fuel price increases and indexation effects from high real wage gains. 

That ranks as the quickest among major regional economies with the exception of turbulent Argentina, where inflation is now above 100%. Pressures on the price of imported goods and services, however, have eased somewhat after the peso advanced more than 4% in March to its strongest level against the dollar in two months.

“Inflation and inflation expectations have extended their uptrend since the January meeting,” Felipe Hernandez, a Latin America analyst at Bloomberg Economics, said before the decision. “They may be close to a peak, but are above target and central bank forecasts.”

In January, key economic data like retail sales and manufacturing showed resilience by expanding above expectations. Yet the combination of rapid inflation and high interest rates will cause the Colombian economy to slow after after posting the strongest growth among major Latin American econmies last year.

Citigroup Inc. economists, including Ernesto Revilla, who correctly forecast Thursday’s decision, said in a note before the meeting that the rate announcement would be the last of the cycle as inflation nears a peak and activity decelerates.

Read More: Colombia Policy Tight Enough to Tame Prices, Cenbanker Says

–With assistance from Rafael Gayol, Andrea Jaramillo and Maria Elena Vizcaino.

(Updates with updated growth forecasts in the fifth paragraph.)

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