April 29, 2016 / 1:32 PM / 2 years ago

Colombia may raise rate to 6.75 pct as tightening cycle nears end

BOGOTA, April 29 (Reuters) - Colombia’s central bank may raise the key lending rate another quarter point on Friday, its eighth consecutive increase, as policymakers try to get a grip on inflation expectations even as economic growth remains weakened by a drop in oil prices.

The seven-member board will likely vote to raise the rate to 6.75 percent, after considering a bigger hike, to trim inflation which at almost 8 percent is twice the upper end of the bank’s 2 percent to 4 percent target range.

“Inflation indicators won’t start to come down in April or May,” said Camilo Perez, chief economist at Banco de Bogota. “So, with that in mind, the bank has another couple of rate increases yet.”

In a survey by Reuters published earlier this week, 14 out of 18 analysts expected the bank to raise the rate 25 basis points while another four predicted a 50 basis-point increase.

Inflation has risen over the past year due to a weak peso and a lengthy drought that has pushed up the price of foodstuffs and imported goods. Economists reckon prices will move as high as 8.12 percent in April.

Meanwhile, national income has been battered by the global fall in prices for crude oil, the country’s most lucrative export and biggest source of foreign exchange.

Colombia’s borrowing costs are the second highest in Latin America after Brazil.

While the bank’s recent decisions have been split, most economists reckon the tightening cycle is nearing its end, an opinion shared by board member Adolfo Meisel, who told Reuters last week that the current pace of 25 basis points was sufficient.

Policymaker Carlos Gustavo Cano, on the other hand, said earlier this month Colombia requires additional, more forceful increases in its benchmark interest rate to anchor inflation expectations.

Still, as the drought begins to recede and the peso strengthens, the bank estimates inflation will start coming down in the second half of the year, ending the year at closer to 6 percent.

Recent gains in the peso’s value against the dollar have reduced the depreciation over the last 12 months to 20.7 percent, down from 31 percent recorded at the close of 2015.

The bank expects GDP growth of 2.7 percent this year, just below the government’s 3 percent forecast. The economy grew 3.3 percent in the final three months of 2015 and expanded 3.1 percent in the full year. (Reporting by Helen Murphy and Nelson Bocanegra; Editing by Bernadette Baum)

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