Colombia central bank expected to hike key rate

Colombia's central bank is widely expected to increase its benchmark interest in its monetary policy meeting slated for Friday as a new bout of torrential rains threatens to unleash inflationary pressures.

A survey by Dow Jones Newswires showed that all seven economists polled project that the central bank will hike its benchmark rate by 25 basis points, putting it at 3.75%.

The central bank started a process of increasing the rate in February after keeping it at record low of 3% for nearly 10 months.

"The inflation expectations for the medium term are increasing and the central bank still needs to deal with a lot of liquidity in the economy," said Jairo Lastra, an economist with brokerage firm Proyectar Valores.

An increase would mark the third consecutive time that the central bank hikes its benchmark rate.

Some economists had wagered last month that the central bank could pause its rate hikes in April and resume later on.

Devastating rains in the last few weeks, which have destroyed roads and inundated farmland, however, seem to indicate that inflation could speed up in the coming months, pressuring the central bank to continue its cycle of rate hikes.

Inflation for the 12 months through March stands at 3.19%, within the central bank's target range of 2% to 4% for the year.

But the monetary authority wants to make sure that price increases remain anchored at around 3%, which will likely push it to increase rates again, said Lastra.

The Colombian central bank's monthly survey of inflation shows analysts are expecting inflation to slightly accelerate in 2011 and close the year at 3.31%. 

Julian Marquez, an economist with brokerage Interbolsa SA, said that the repercussions of "the recent flooding have not yet been incorporated" into inflation expectations for the year, which could push the forecasts for price increases higher.

Agriculture Minister Juan Camilo Restrepo has that said that 14% of Colombia's farmland had been affected by the rains that lashed much of the country in the last months of 2010 and that the process of recovering those lands in some cases would be very slow.

Food prices are a decisive component in Colombia's inflation index, accounting for 28% of the consumer price index.

While the central bank has signaled in past meetings that it plans to continue hiking rates, it also has said it doesn't think it will be necessary to increase them to the high levels seen in previous economic cycles.

Colombian investors also will be watching Friday for a possible announcement by the central bank on the forex front.

The peso has been appreciating strongly against the dollar, ramping up pressure on the government to take action. 

Finance Minister Juan Carlos Echeverry earlier this week, however, said the government wasn't planning on using capital controls, which limit foreign investment, to curb the peso's appreciation.

The central bank could announce it is increasing its dollar-buying program of $20 million daily in the spot market, a move designed to drain U.S. currency from the forex market, said Lastra.

The bank also could extend its dollar-buying dollar program beyond its June deadline.

That possible move "could help stabilize the exchange rate and reduce volatility," he added.