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Sunday, June 12, 2011

Colombia rates may be inconsistent with GDP cbank

Less expansive monetary policy must continue.

Colombian president cautioned bank on more rate hikes (Recasts lead, adds quotes from minutes and analyst, background, byline)

Colombia's central bank warned of the risk of keeping interest rates too low at a time when economic growth is surging and inflation is close to the midpoint of the bank's target range, minutes released on Friday showed.

The central bank said that nominal and real interest rates were at "record low levels," according to minutes of the bank's May 30 meeting.

Latin American nations have been raising rates to fight inflation spurred by higher fuel and food costs after having cut them to fight fallout from the global economic crisis and policy makers seem to be getting the upper hand.

"Low real interest rates for an excessively long period of time ultimately can pose a risk to financial stability," the minutes said.

"Moreover, the rate may be inconsistent with the near-potential growth expected in 2011 and 2012 and a forecast for inflation near the mid-point of the long-term target range," it said.

The bank's seven-member board on May 30 hiked its benchmark interest rate for the fourth straight time by 25 basis points to 4 percent.

A day later Colombian President Juan Manuel Santos asked the central bank to think twice about further interest rate increases.

The central bank's board next meets on June 17.

"We expect the central bank to deliver another 25 basis point rate hike at the June 17 meeting and to drive the policy rate to around 4.50-5.00 percent by year-end 2011," Alberto Ramos of Goldman Sachs said in a note.

"However, a pause, as urged by President Santos, cannot be altogether ruled out, but we feel that continuing to normalize policy would reinforce the independent and inflation-fighting credentials of the central bank."

The central bank says inflation expectations are now with the target range of 2 percent to 4 percent. It expects economic growth of between 4 percent and 6 percent this year.

Colombia regained its second investment-grade credit rating last week, which makes investing in Colombia more attractive, and the influx of foreign investment could put upward pressure on the peso currency, which has firmed 7.4 percent this year.

The minutes only mentioned the strong peso as a discussion point -- the bank extended a dollar purchasing program to at least Sept. 30 to fight the strong peso at the last meeting.

The minutes said terms of trade were improving and contributing to growth in the national income.

The bank's minutes showed it reiterated its belief that rate hikes would help keep inflation within the target range for 2011 and 2012 and aid in avoiding financial imbalances.

"The Board of Directors felt the move towards a less expansive monetary policy must continue," it said.

"The anticipated monetary-policy actions, coupled with an austere fiscal stance, should reduce the extent to which the intervention interest rate would have to be raised in relation to the levels witnessed in past economic cycles," it said.

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