BOGOTA, Sept 21 (Reuters) - Raising Colombia’s benchmark interest rate would be bad for its slowing economy, central bank board member Cesar Vallejo said, adding that accelerating inflation is temporary and anchored to expectations.
Vallejo, one of seven members of the central bank board, told a local newspaper on Sunday that though there has been a pronounced deceleration in the economy, it has been orderly and Colombia is doing better than other countries in the region.
The Andean nation’s economy grew 3 percent in the second quarter of 2015.
“The economy is decelerating and raising the rate would be like kicking us when we’re down,” Vallejo told El Tiempo newspaper.
“It’s clear that there is a very strong deceleration, we should be seeing excesses of capacity which will take inflation down to the goal,” he said.
The central bank has set a 2 percent to 4 percent goal for year-end inflation. Consumer prices reached 4.74 percent in the twelve months to August.
Policymakers on the bank’s board have held borrowing costs at 4.5 percent for the last 12 months. However, analysts have said the board ought to raise the rate to counteract inflation.
But Vallejo said consumer price increases, spurred by a 51 percent depreciation in the peso currency and higher food prices due to the El Nino weather phenomenon, cannot be offset by rate rises.
“When people get nervous and believe that all prices are going to go up, that creates a contagion and they start to ask for better wages, people stock up before prices rise and it becomes an inflation spiral that has no relation to reality,” Vallejo said.
“That can do a lot of damage to the economy. If that happens you don’t act using rates,” he added.
A peso-to-dollar exchange rate of 2,600 or 2,800 pesos to the dollar would be reasonable, the policymaker added. The currency was 2,984.9 to the dollar on Monday. (Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb; Editing by Jeffrey Benkoe)