Colombia’s central bank delivered its biggest interest rate hike in more than two decades, potentially putting itself on a collision course with President-elect Gustavo Petro as policymakers intensify their battle against inflation by above the target.
The council raised the interest rate by 150 basis points to 7.5%, manager Leonardo Villar told reporters after Thursday’s policy meeting. That is the biggest gain since the bank implemented its inflation-targeting strategy in 1999.
The decision was correctly forecast by 15 of 24 economists surveyed by Bloomberg, including those at JPMorgan Chase & Co and Credit Suisse Group AG. Barclays Plc and five other forecasters forecast a full percentage point increase, while two expected a 125 basis point increase and one a 75 basis point increase.
This is the first rate decision since Petro he won the presidency earlier this month. The peso has depreciated since the June 19 vote, making imports even more expensive, while financial markets remain concerned about the leftist leader’s plans to end oil exploration and reforms to pensions.
Colombian policymakers are bracing for another spike in annual inflation that is already above 9%. The rising cost of living has been driven by higher commodity prices and strong activity. Fuel will become more expensive in the coming months as the government phases out subsidies.
Policymakers in Latin America have been forced to extend their monetary tightening campaigns, as the US Federal Reserve begins its own cycle of interest rate hikes. With today’s decision, Colombia it has increased its borrowing costs by 575 basis points since September, more than Mexico and Peru although much less than Chile and Brazil.
Opposite Rate Increases
During the presidential campaign, Petro criticized increases in interest rates and said they would harm the economic growth and to the labor market. His comment that some sectors of the economy should have seats on the bank’s board and that policymakers should also seek to combat inequality worried some of the investors.
However, this week Petro appointed a renowned economist, José Antonio Ocampo, as finance minister, in a sign that he is moving to calm investors. Ocampo, 69, will also have a seat on the central council after resigning in January 2020 when he was co-director of the institution.
The International Monetary Fund expects Colombia’s gross domestic product to expand 5.8% this year, more than any other major Latin American economy. The nation’s current account deficit is one of the largest in emerging markets.
Colombia’s annual inflation eased to 9.07% in May, but is still well above the central bank’s 3% target. Consumer prices likely rebounded 9.74% this month, according to economists in a Bloomberg survey.