Colombia raises benchmark interest rate again

The board of directors of Banco de la República – Colombia's central bank – decided in its Friday meeting to hike the benchmark interest rate by another 25bps to 5.50%. In October the central bank surprised the markets with a larger-than-expected 50bps increase.

The central bank explained that the move, which was expected by analysts at firms including Goldman Sachs, was mainly a consequence of high cumulative inflation, higher expected inflation, and a positive trend in industrial production and construction activity.

Inflation stood at 5.89% YTD in October compared to the 4.0% central bank target. According to the central bank, this high rate was due mainly by the knock-on effect of the peso's devaluation on import prices and the negative influence of agricultural produce prices due to the impact of the El Niño phenomenon.

Meanwhile, the market has continued seeing high inflation expectations, with analysts projecting 4.4% and 3.6% inflation for 2016 and 2017, respectively.

The upward trend in industrial and construction activity also helped pave the way for the interest rate hike by reducing concern about a consequent economic slowdown.

The bank maintained its projection of 2.4%-3.4% GDP growth in 2015, with 3.0% seen as most likely figure.