December 21, 2018 / 5:58 PM / 6 months ago

UPDATE 1-Colombia's central bank holds key rate as it eyes external markets

(Adds detail discussion, comment)

By Helen Murphy

BOGOTA, Dec 21 (Reuters) - Colombia’s central bank held its benchmark interest rate stable on Friday to give a final boost to the economy before it likely begins raising the rate next year to contain inflation and align with international monetary policy trends.

The seven-member policy board voted unanimously to leave borrowing costs at 4.25 percent, unchanged since last April. Analysts expect the bank to begin lifting in March and raise borrowing costs 75 basis points throughout 2019.

The bank’s discussion focused on oil prices, possible fallout from trouble in other emerging markets and concerns over the speed with which the economy is recovering, even as Colombian inflation continues close to the bank’s 2 percent to 4 percent target.

International market turbulence and lower oil prices are beginning to hit Colombia, with the peso currency falling as investors retreat from emerging markets and the U.S Federal Reserve raises interest rates, drawing investors away.

“The Federal Reserve increased its reference interest rate and, for 2019, less increases are expected than in the last quarter. The fall in oil prices and the lower outlook for world growth have been reflected in upward pressures on risk premiums and the country’s exchange rate,” the bank said in a statement.

The policy board also likely discussed Colombia’s newly approved tax reform.

Annual consumer prices rose 3.27 percent in November, slightly above the bank’s ideal 2019 inflation target of 3 percent.

Still, inflation may be affected next year by an increase in food costs as an oncoming El Niño weather phenomenon is seen having an impact on harvests and energy prices. The government has also announced a 6 percent increase in the monthly minimum wage, which could stoke prices.

Tax reform approved this week may also have an adverse effect on consumers as duties on beer, soft drinks and banks hit spending and credit and new income taxes are levied on middle and high earners.

“There’ll surely be a lengthy chat about external events impacting Colombian capital markets recently, be it the effect of the Federal Reserve on the bond market or the oil price and the peso - all factors outside of the policy committee’s control but which need to be to factored in,” said Rupert Stebbings, institutional equities adviser at Alianza Valores.

The bank has held the interest rate steady since April, after making cuts of 350 basis points from December 2016 in a bid to bolster the economy. (Reporting by Helen Murphy Editing by Chizu Nomiyama and Tom Brown)

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