Colombia's cenbank hikes rate, frets over global woes

Colombia's central bank raised its benchmark interest rate on Friday for the first time in four months and warned it could adjust monetary policy "rapidly" if the global economic crisis impacted the economy.

    

While Colombia has benefited from a decrease in drug-funded violence and has attracted record investment in oil and mining, the bank sought to pull monetary stimulus by boosting the lending rate a quarter point to 4.75 percent.

    

The decision, which was not unanimous, met forecasts by 18 of 35 economists. 

Another 15 had expected policy makers to hold rates steady "The biggest risk to inflation comes from excessive increases in demand," said bank chief Jose Dario Uribe after announcing the decision. 

"The biggest risk to growth forecasts is disorderly adjustments in Europe.

    

"The decision incorporates the possibility of detecting in time any substantial change in external economic conditions and being able to react rapidly," Uribe said.

    

The decision bucked a trend among central banks in Latin America to hold or cut rates on concerns that Europe's debt crisis will slow global growth and harm domestic economies.

    

Brazil has trimmed borrowing costs twice since August, and its central bank chief said the "substantial" worsening of the economic outlook abroad, even without an extreme shock, supports "moderate adjustments" in rates.

    

Peru, Chile and Mexico have hinted they may follow suit.Colombia's vote followed five hours of discussion focused on cooling the pace of lending, which has encouraged consumers to spend on big-ticket items like cars and real estate, pushing annual inflation to its highest in two and a half years.

    

Policy makers also measured the impact Europe's debt crisis could have on Colombia's economy, Latin America's fourth-biggest, as well as moderate U.S. growth.

    

"The bank needed to strike a balance between local and international risk," Alejandro Reyes, chief economist at Bogotá-based Ultrabursatiles said before the rate decision.

    

"External risk that caused the bank to hold the rate last month is still uncertain; that hasn't changed."

Uncertainty and rates

Colombia's economy has reaped the dividends of improved security as government troops battle insurgent groups like the Revolutionary Armed Forces of Colombia, known as the FARC, leaving the drug-funded rebels in disarray.

    

The economy may grow 5.5 percent in 2011 after expanding 4.3 percent in 2010, according to the finance ministry, with expansion next year of between 4.5 percent and 6 percent.

    

The monetary authority set an inflation target for next year of between 2 percent and 4 percent  the same as 2.011.

"The new rate provides a better comfort level and helps anchor inflation expectations going into .2012," Interbolsa, Colombia's biggest brokerage, said in an emailed statement.

    

Colombian President Juan Manuel Santos expressed concern that a downturn in the world economy could impact Colombia, telling an investment summit in London this week "we are very worried that eventually it will touch us."

    

The European crisis has helped stem gains in the peso as investors lose appetite for riskier assets. 

Economic growth and record investment boost the value of the currency against the dollar, creating problems for exporters, who complain they earn fewer pesos for their dollar-denominated sales.

    

The bank last month reestablished a program to reduce volatility in the forex market through auctions of dollar put and call options when the peso fluctuates 4 percent above or below a 20-day moving average.