18 de diciembre de 2015 / 13:31 / en 2 años

Colombia set to up rates to fight inflation, bolster credibility

BOGOTA, Dec 18 (Reuters) - Colombia’s central bank may raise its benchmark lending rate a quarter point on Friday to put the brakes on accelerating inflation and bolster credibility with investors who feel it should have acted sooner.

The seven-member policy board is likely to increase borrowing costs to 5.75 percent, after raising rates a percentage point over the last three meetings.

The bank has sought to play catch up on stemming inflation which has risen well above its 2-4 percent target range since February. The market has raised concerns policymakers should have begun tightening in May, and the minutes of the last meeting showed concern for its credibility.

“The bank has been behind the curve and so has to keep raising rates to manage expectations in the medium and long term,” said Andres Abadia, senior international economist with Pantheon Macroeconomics in London.

“A rise in Colombia’s interest rates will help cushion the tension, but not eliminate it. It’s necessary, not only for what the Fed does, but also for the spike in inflation.”

The U.S. Federal Reserve’s interest rate increase could pull investment away from Colombia. Higher borrowing costs locally could soften that, while at the same time further weaken the currency and stimulate inflation.

Still, better-than-expected growth in the third quarter has provided room for policymakers to continue tackling consumer prices - sent higher by a hefty weakening of the currency and dry weather. Inflation in November was 6.39 percent.

The peso currency has devalued 35.6 percent over the last 12 months.

Some analysts see inflation hitting 7 percent next year, before coming down to end 2016 at about 4 percent.

Given that, some economists see the possibility of a half point increase on Friday. At the last meeting some of the board called for an increase of 50 basis points.

A Reuters poll published on Monday showed 24 of 29 analysts surveyed expected the bank to lift the rate 25 basis points. Another three saw the interest rate being pushed up 50 basis points. Two forecast the bank holding the rate at 5.5 percent.

Latin America’s fourth-largest economy is facing a growth slowdown that has led the government to reduce expansion projections to 3.3 percent from 3.5 percent for this year and next. The bank expects growth at about 3 percent both years, down from 4.6 percent last year.

A drop in oil prices has hurt the government’s spending plans. Crude oil is Colombia’s biggest export and leading source of foreign currency. (Reporting by Helen Murphy and Nelson Bocanegra; Editing by Andrew Hay)

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