Colombia central bank raises policy rate for 10th straight month to curb inflation

Colombia’s central bank raised its monetary policy rate for the 10th straight month in a row, in a bid to curb inflation, reiterating its statement from May that it must ensure that the recent shocks to inflation remain temporary and inflation converges towards its target in 2017.

The Central Bank of Colombia raised its policy rate by another 25 basis points to 7.50 percent, as expected, and has now raised it by 300 points since embarking on a tightening cycle in September 2015. This year it has raised its key rate by 175 points.

"Increases in food prices and the pass-through of nominal depreciation to consumer prices continue to exert inflationary pressures," the central bank said in its monetary policy statement Thursday.

Colombia’s headline inflation rate rose to 8.2 percent in May from 7.93 percent in April, with the central bank again noting that the impact of the El Nino weather pattern on food prices and the magnitude of the depreciation of the peso had moved inflation and inflation expectations away from its target and also triggered indexation mechanisms.

But core inflation eased to 6.55 percent in May from 6.69 percent and expectations embedded in public debt bonds for 2, 3 and 5 years eased to 4.0 percent and 4.5 percent from 4.3 percent and 4.7 percent in May. The central bank targets inflation of 3.0 percent and Colombia’s government earlier this month raised its inflation forecast for this year to 6.5 percent.

"Our central scenario contemplates that the repo rate should be keep at the current level for the rest of the year," BBVA Research said in its research note.

Meanwhile, Colombia’s economy has been slowed due to poor pricing in oil and commodity sector with annual growth the first quarter of 2.5 percent, down from 3.4 percent in the previous quarter as domestic demand eased less than market expectations.

The Board will continue to monitor the expected adjustment of expenditure and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, macroeconomic stability. Similarly, it reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.