Colombia lifts key rate to most since 1999 after market dive

BLOOMBERG

Colombia raised interest rates to the highest level since 1999 after political turmoil triggered a plunge in the nation’s bonds and currency.
The central bank lifted its benchmark rate by a quarter percentage point to 13.25% on, Governor Leonardo Villar told reporters in Bogota. Four of the seven-member board voted for the move, two voted to hold, and one argued for a bigger increase, of half a percentage point.
The decision was forecast by 14 of 27 analysts surveyed by Bloomberg, while the rest had expected the bank to leave the rate at 13%, ending a year and a half of monetary tightening.
Colombia’s move flouts a regional trend. Brazil, Peru and Chile have halted interest rate increases, and some smaller countries in the region — Costa Rica and Uruguay — have even started to ease policy. Among major economies, only Mexico and Colombia have continued to increase borrowing costs in recent months, and in Mexico’s case, policymakers will analyse halting the tightening cycle at their next meeting on May 18, Banxico Governor Victoria Rodriguez said.
President Gustavo Petro’s decision to oust his market-friendly Finance Minister Jose Antonio Ocampo sent the peso plunging nearly 3%, the biggest drop among more than 140 currencies, while the cost of insuring Colombian bonds against default jumped. Goldman Sachs Group Inc said before the meeting that the rate rise would “counter a rising country risk premium.”
“Economic activity continues to decelerate, but at a slower rhythm than previously,” the bank said in its statement.
“Inflation expectations remain above the target.”
Policymakers have raised their key rate by 11.5 percentage points starting in September 2021, in their steepest-ever series of monetary tightening.
The bank is now caught between a slowing economy, and a persistently elevated inflation rate. While consumer price rises are slowing in other major economies in the region, in Colombia they have continued to accelerate.
Annual inflation accelerated to 13.34% in March, though the bank expects it to start slowing this quarter. The central bank forecasts economic growth of just 0.8% this year, from 7.5% in 2022.