Colombian central bank raises rates by 100 basis points

The Central Bank of Colombia increased interest rates by 100 basis points on April 29 in a bid to tame rising inflation.

As a result, the policy rate now stands at 6%. Three of the seven board members voted for an even larger rate increase of 150bp.

In March, year-on-year inflation rose to 8.5%, up from 8% in February. The central bank’s medium-term inflation target is 3%. The board forecasts inflation will progressively decline to 4% by the end of 2023, and to 3.7% two years from now.

The central bank believes the Colombian economy is sending signals it is in a robust state and can tolerate tighter financing conditions. “Economic activity continues to suggest significant dynamism in the Colombian economy,” says the policy statement. “The technical staff has revised its growth forecast for 2022 upward from 4.7% to 5% and maintained its 2023 growth projection at 2.9%.”

In addition to local conditions, the US Federal Reserve has just begun a new tightening cycle, which is boosting the dollar and putting downward pressure on emerging market currencies such as the Colombian peso. This inflationary factor is reinforced by higher food prices resulting from the Russian invasion of Ukraine.

Also on April 29, the International Monetary Fund’s executive board approved a new two-year arrangement for Colombia under the flexible credit line (FCL). This makes SDR 7.2 billion, around $9.8 billion, available to Colombian authorities, and replaces the previous SDR 12.3 billion FCL that was approved in September 2020. Authorities will treat these resources as precautionary, according to the IMF.