Colombia's Central Bank Holds Key Rate, But Considers Increases

The Colombian central bank kept its key interest rate on hold for a third straight month due to concerns over the global economy but said it could renew its rate-hike cycle if the international situation stabilizes.

The decision to hold rates was widely expected by investors, with all seven analysts polled by Dow Jones Newswires projecting that the bank would keep its benchmark rate at 4.5%. 

Prior to August, the bank increased rates for six straight months, starting in February.

Extending a trend seen in the last monetary policy meetings, the central bank warned that the thorny economic situation overseas, including Europe's sovereign debt woes and a potential new recession in the U.S., could have a backlash in the Colombian economy.

"However, if international confidence begins to return and if domestic indicators continue with vigor and there doesn't appear to be a large contagion from the external situation, it's probable that the economy will require less monetary stimulus," said Jose Dario Uribe, the central bank's chairman.

He also said the bank's decision to keep rates on hold wasn't unanimous, but didn't provide further details on the voting.

Colombia's gross domestic product, a broad measure of economic output, expanded 5.2% in the second quarter of the year. President Juan Manuel Santos has said he expects the third quarter to at least match that result.

The central bank, meanwhile, projects that the economy will expand between 4.5% and 6.5% for the year. 

The Colombian economy relies heavily on commodity exports, especially oil and coal, so a drop in economic activity abroad could potentially slow domestic growth.

The central bank, which in recent years has had a hawkish stance against inflation, said it is confident that price increases for the year will stay within its target range of 2% to 4%, although it added in the statement that it will likely finish the year in the higher end of that range.

If Colombia suffers heavy rains in the coming months, something government officials have warned is likely to occur, price increases could speed up like they did during the rainy season in 2.010. 

Inflation for September accelerated 0.31%, higher than expected, and 12-month inflation stands at 3.73%.

On the currency front, the central bank Friday adjusted a volatility-control tool it had announced a month ago in which it said it would step in and buy or sell $200 million dollars if the peso moves up or down by more than 2% from its 10 day average.

The new policy, it said, is to buy $200 million if it moves 4% up or down from the 20-day moving average. 

Rather than direct dollar sales, it said the new policy will be to buy or sell dollars through put and call options.