Colombia unexpectedly lifts rate to 7% amid 15-year high CPI

Bloomberg

Colombia’s central bank raised its benchmark interest rate by more than analysts forecast as inflation surged to its highest level since 2001 following the most severe drought in decades.
The seven-member board voted to lift borrowing costs by half a point to 7 percent citing concern that inflation will return to target more slowly than forecast, central bank Governor Jose Dario Uribe told reporters in Bogota. The decision, which was not unanimous, was forecast by 10 of 39 analysts surveyed by Bloomberg, with the other 29 predicting a quarter-point increase.
Annual consumer-price growth accelerated to 7.98 percent in March as a weaker peso raised the cost of imported goods and a drought caused by the El Nino weather phenomenon pushed up food prices and came close to causing electricity blackouts in the hydroelectric-dependent nation. Policy makers have been surprised by the strength of inflationary pressure, which they had underestimated, according to Francisco Chaves, a strategist at Corredores Davivienda in Bogota.
“We can say that the central bank was behind the curve, and had to raise by half a percentage point to deal with inflation that continues to pressure on expectations,” Chaves said. “They should have done this 3 or 4 months ago, but at least they’ve done it.”
The bank removed language in recent statements when they said they would continue to raise rates and cut its forecast for 2016 economic growth to 2.5 percent from 2.7 percent. The economy expanded 2.5 percent in the first three months of the year from a year earlier, according to the bank’s estimates.
“The strong increases in food prices and the partial transfer of the devaluation to domestic prices continues to exert pressure over inflation,” the central bank said in a statement today. “This is happening in a context of an excess of spending over national income and while the risk of an excessive slowdown in internal demand remains moderate.”
Two-year inflation expectations rose to 3.56 percent in April, according to a central bank survey of economists, from 3.5 percent the previous month. Colombia targets inflation of 3 percent, plus or minus one percentage point.
Central bank co-director Carlos Gustavo Cano publicly stated at least four times this month before the meeting that stronger interest rate adjustments were needed in order to ensure the convergence of inflation to the target.
The peso has dropped 16.5 percent over the past year, the most in emerging markets after the Argentine peso, the Russian ruble and the South African rand.