October 29, 2016 / 12:27 AM / in 2 years

UPDATE 1-Colombia cenbank holds interest rate steady as inflation remains high

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BOGOTA, Oct 28 (Reuters) - Colombia’s central bank held its benchmark interest rate unchanged on Friday as policymakers attempt to quell stubbornly high inflation even as economic growth slows.

The seven-member board voted unanimously to maintain the lending rate at 7.75 percent for a third month after raising it 325 basis points over the course of a year to ease inflationary pressure.

The bank has sought to ease inflation even as economic growth slows amid a slump in crude oil prices. The bank on Friday cut its economic growth estimate for the year to 2 percent from 2.3 percent.

Consumer prices have begun to fall after reaching nearly 9 percent in July. They will probably continue to recede now that a prolonged drought, truckers strike and currency depreciation, which lead to spikes in consumer prices, have eased, the bank said.

“The effects of strong temporary supply shocks that diverted the inflation target are beginning to dilute at a slightly higher rate than expected. This is indicated by the slowdown in food CPI and the recent behavior of prices most impacted by the last strong nominal depreciation,” the bank statement said.

Inflation reached 7.27 percent for the 12 months ending in September, down from a high of 8.91 percent in July, but still well above the bank’s long-term target range of between 2 percent and 4 percent.

Food prices, which make up about 30 percent of the inflation index, should continue to fall until at least the first quarter of next year, policymakers said.

In a Reuters poll published on Monday, all 15 analysts expected the interest rate to be held this month. Three said policymakers would begin cutting the rate in November or December.

Finance Minister Mauricio Cardenas said a rate cut would need to wait.

“When there’s total certainty that next year’s inflation is within the target range of 2-4 percent, that’s when we can start adopting measures to cut the interest rate,” said Cardenas, who represents the government on the board.

The government recently presented a tax reform aimed at raising billions of dollars in the coming years to make up for lost oil revenue and preserve its investment-grade credit rating.

The reform would raise the value-added tax to 19 percent from 16 percent, excluding basic products like food and medications.

“Given the negative effects of falling oil prices on public finances, the proposed structural tax reform presented by the government to Congress is a fundamental action that contributes to long-term growth,” the bank said. (Reporting by Carlos Vargas, Monica Garcia, Helen Murphy and Nelson Bocanegra; Editing by Lisa Shumaker)

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