Colombia Shocks Traders With Smaller-Than-Expected Rate Increase to 5%

(Bloomberg) -- Colombia surprised traders and economists with a smaller-than-expected interest rate increase after the central bank was criticized by senior politicians.

The bank lifted its key rate by one percentage point to 5%, governor Leonardo Villar told reporters Thursday. Analysts had expected a bigger increase given recent inflation shocks and an economy that is now operating close to full capacity.

Five of the seven-member board backed the move, while two argued for a bigger increase of 1.5 percentage point. Markets were closed when the decision was announced.

“There was a full consensus on the need to for an important increase in the interest rate to move toward having a less expansive policy,” Villar said.

The rate increase was smaller than all 24 analysts surveyed by Bloomberg had forecast. Traders, and the majority of economists, had predicted a 1.5 percentage point hike.

Latin American central banks have been withdrawing stimulus as businesses and jobs markets recover from the pandemic, but in some countries, such as Brazil and Chile, the process is now seen nearing its end. All the region's major economies saw inflation burst out of target ranges even before Russia's invasion of Ukraine boosted food and fuel costs in late February, but policy makers are betting that much of that shock will be temporary.

What Bloomberg Economics Says
“High uncertainty about the economic outlook and concerns about lingering weakness in the lagging labor market are behind the smaller hike. Higher oil prices may have also contributed; they reduce external and fiscal imbalances and risks from external financial conditions, which policy makers have mentioned in previous meetings.”
-- Felipe Hernandez, Latin America economist
-- Click here for the full report

Political Complains

Some political leaders have complained about the bank's monetary tightening as the country approaches a presidential election in May.

Front-runner Gustavo Petro said in January that the bank's decision that month to increase the rate was a terrible decision that would hurt the economic recovery. President Ivan Duque also offered some unsolicited advice, saying policy makers should be careful not to hurt growth with “very aggressive” increases.

The bank has a long track record of asserting its independence against attempted interference from presidents including Juan Manuel Santos, who lead the country from 2010 to 2018, and from Alvaro Uribe, who was head of state from 2002 to 2010. At the same time, it has historically been one of the region's least-predictable central banks, which has often delivered surprises.

Read More: Least Predictable Central Bank in the Americas Surprises Again

The political calendar “could be playing some role”, said Andean chief economist at BTG Pactual. “Obviously, we'll never know that because, within the independence of the bank it's something they'd consider but never make explicit.”

Colombians vote for president on May 29, with a possible runoff in June.

Peso Rally

The modest rate increase is evidence that the bank tends to be “conservative” and “gradualist” in its approach, said Camilo Perez, head of research at Banco de Bogota.

The bank has also got some help in its inflation fight by an 8% rally in the peso this year.

Consumer prices rose 8% in February from a year earlier, the fastest inflation since 2016 and double the upper limit of the central bank's target range.

Gross domestic product will expand by 4.7% this year, the bank said in its updated forecast, more than double the expected average for the region.