Colombian policy makers last month raised interest rates only after a detailed discussion of inflation, accelerating economic growth and the threat posed by a global economic slowdown, heightening the possibility they will keep the rate unchanged next week.
In the second consecutive split decision, the central bank raised the benchmark rate by 25 basis points to 4.50 percent on July 29 over the dissent of at least one board member, who argued for a pause and said additional rate increases might boost inflows and fan inflation.
“While internal variables remain positive, the external context is very somber,” said Julian Marquez, an analyst at Bogota-based Interbolsa SA, Colombia’s biggest brokerage, in an emailed note to investors.
“We expect a pause at the August meeting.”
Since the seven-member board met last month, global markets have tumbled as the European debt crisis and Standard & Poor’s downgrade of U.S. debt have shaken investor confidence in a worldwide recovery.
Peru’s central bank kept its benchmark rate unchanged yesterday for a third month, citing rising global risks.
Chilean and Brazilian policy makers this month may also decide to pause given current market turbulence, BNP Paribas said in a report this week.
“For the remainder of 2.012 developed economies will confront limited growth,” according to minutes of the meeting.
“The rhythm of expansion will probably remain under historic averages due to the high levels of indebtedness and increasing financial costs.”
‘Dynamism’
Colombia’s policy makers have raised borrowing costs by 150 basis points in 2011, the third most among the inflation targeting central banks in Latin America after Chile and Brazil.
While inflation remains within the bank’s 2 percent to 4 percent target range, the annual rate rose to a two year high of 3.42 percent in July and a majority of the board’s members expressed concern about a rapid expansion of domestic demand.
Among reasons for voting to raise, the members pointed to “the dynamism in the Colombian economy led especially by household consumption and investment in public works projects.”
Business and home credit is increasing “significantly above gross domestic product” because real interest rates remain at historically low levels, they said.
Total gross lending rose 23 percent in May from a year earlier eclipsing Brazil’s 20 percent pace to a record 191.2 trillion pesos ($107.3 billion).
Local, Global View
Most policy makers said Colombia’s accelerating economy, which Finance Minister Juan Carlos Echeverry said yesterday may grow as much as 7 percent in the third quarter, suggests a closing output gap in the second half of 2.011.
They discussed “ever increasing” bank lending and consumer debt.
Growth in the second quarter would likely be similar to the first quarter when it expanded a year on year 5.1 percent while the economy is likely to accelerate in the second half of the year, the minutes said.
The bank raised its 2011 economic growth forecast to a range of 4.5 percent to 6.5 percent, up from 4 percent to 6 percent previously.
The dissenting board member noted that “the monetary authority of our main trading partner, the United States under the pressure of stagnation, fears of a double-dip recession and persistent and high unemployment will undoubtedly not begin to raise before 2.013.”
Feedback Loop
The same board member noted that inflation remained within the bank’s target range and that a rate increase would likely lead to increased inflows.
That could lead to a further expansion of credit, according to the minutes.
“We could end up feeding what we seek to control, inflation,” the board member said.
The U.S. Federal Reserve in fact this week did announce that it would keep interest rates at an all time low through mid-2013. Higher borrowing costs in Colombia going forward would then widen the current U.S.
Colombia yield gap and so help attract additional inflows.
In a separate report, a central bank survey showed that economists expect policy makers to keep inflation in check.
Economists covering the Colombian economy maintained their 2.011 inflation forecast at 3.3 percent, according to a central bank survey of 39 economists published today.
They expect inflation to slow to 0.13 percent this month from 0.14 percent in July.
Economists surveyed by the bank also expect policy makers to raise the benchmark rate to 5 percent by year end, according to the average estimate in the survey.
In the second consecutive split decision, the central bank raised the benchmark rate by 25 basis points to 4.50 percent on July 29 over the dissent of at least one board member, who argued for a pause and said additional rate increases might boost inflows and fan inflation.
“While internal variables remain positive, the external context is very somber,” said Julian Marquez, an analyst at Bogota-based Interbolsa SA, Colombia’s biggest brokerage, in an emailed note to investors.
“We expect a pause at the August meeting.”
Since the seven-member board met last month, global markets have tumbled as the European debt crisis and Standard & Poor’s downgrade of U.S. debt have shaken investor confidence in a worldwide recovery.
Peru’s central bank kept its benchmark rate unchanged yesterday for a third month, citing rising global risks.
Chilean and Brazilian policy makers this month may also decide to pause given current market turbulence, BNP Paribas said in a report this week.
“For the remainder of 2.012 developed economies will confront limited growth,” according to minutes of the meeting.
“The rhythm of expansion will probably remain under historic averages due to the high levels of indebtedness and increasing financial costs.”
‘Dynamism’
Colombia’s policy makers have raised borrowing costs by 150 basis points in 2011, the third most among the inflation targeting central banks in Latin America after Chile and Brazil.
While inflation remains within the bank’s 2 percent to 4 percent target range, the annual rate rose to a two year high of 3.42 percent in July and a majority of the board’s members expressed concern about a rapid expansion of domestic demand.
Among reasons for voting to raise, the members pointed to “the dynamism in the Colombian economy led especially by household consumption and investment in public works projects.”
Business and home credit is increasing “significantly above gross domestic product” because real interest rates remain at historically low levels, they said.
Total gross lending rose 23 percent in May from a year earlier eclipsing Brazil’s 20 percent pace to a record 191.2 trillion pesos ($107.3 billion).
Local, Global View
Most policy makers said Colombia’s accelerating economy, which Finance Minister Juan Carlos Echeverry said yesterday may grow as much as 7 percent in the third quarter, suggests a closing output gap in the second half of 2.011.
They discussed “ever increasing” bank lending and consumer debt.
Growth in the second quarter would likely be similar to the first quarter when it expanded a year on year 5.1 percent while the economy is likely to accelerate in the second half of the year, the minutes said.
The bank raised its 2011 economic growth forecast to a range of 4.5 percent to 6.5 percent, up from 4 percent to 6 percent previously.
The dissenting board member noted that “the monetary authority of our main trading partner, the United States under the pressure of stagnation, fears of a double-dip recession and persistent and high unemployment will undoubtedly not begin to raise before 2.013.”
Feedback Loop
The same board member noted that inflation remained within the bank’s target range and that a rate increase would likely lead to increased inflows.
That could lead to a further expansion of credit, according to the minutes.
“We could end up feeding what we seek to control, inflation,” the board member said.
The U.S. Federal Reserve in fact this week did announce that it would keep interest rates at an all time low through mid-2013. Higher borrowing costs in Colombia going forward would then widen the current U.S.
Colombia yield gap and so help attract additional inflows.
In a separate report, a central bank survey showed that economists expect policy makers to keep inflation in check.
Economists covering the Colombian economy maintained their 2.011 inflation forecast at 3.3 percent, according to a central bank survey of 39 economists published today.
They expect inflation to slow to 0.13 percent this month from 0.14 percent in July.
Economists surveyed by the bank also expect policy makers to raise the benchmark rate to 5 percent by year end, according to the average estimate in the survey.
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