July 29, 2016 / 1:02 PM / 2 years ago

Colombian cenbank seen raising rate 25 bps to beat inflation

BOGOTA, July 29 (Reuters) - Colombia’s central bank will likely raise its benchmark interest rate by a quarter-percentage point on Friday even though the economy remains sluggish, as fast-climbing consumer prices put its 2017 inflation target at risk, analysts said.

The seven-member board’s decision may well be split as some policymakers believe the rate should be held at 7.5 percent to allow breathing space for the economy and as increases in consumer prices are seen as temporary.

In a Reuters poll published last week, 16 out of 22 analysts bet the rate would be raised to 7.75 percent, while the remaining six forecast the bank would hold.

The market had expected the bank to pause its monetary tightening cycle after last month’s rate increase. But the annual inflation rate accelerated to an unexpectedly high 8.6 percent in June, reflecting the possible need for another hike.

Should the 25 basis points rate hike materialize, it would mark the 11th straight month the bank has voted to increase borrowing costs, pushing the rate up a cumulative 325 basis points to 7.75 percent.

“Although the majority of the board believes that its work in this upward cycle is almost complete, as long as inflation continues to surprise on the upside as in June, the response of the monetary authority will be to continue increasing the rate,” said Bancolombia analyst Rupert Stebbings, who sees a divided vote.

“The most recent readings of leading indicators suggest a slowdown in productive activity in the second quarter larger than expected.”

Finance Minister Mauricio Cardenas, who represents the government on the board, said after the central bank’s June 22 hike that it would mark the end of the credit tightening cycle.

“The job is done now,” he said back then. “We don’t want to go overboard.”

A drought across the nation, a 45-day truckers strike which ended last week, and the weakened peso currency have pressured inflation as food and energy prices rise, sending inflationary outlooks higher.

Consumer prices are expected to head even closer to 9 percent in July because of the strike.

As a result, some analysts see the bank continuing to raise the rate after July as the 2 percent to 4 percent long-term inflation target range may be in jeopardy. The bank aims for inflation to fall within that range by the end of next year. (Reporting by Helen Murphy; Editing by Richard Chang)

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