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Central Banker Says Colombia Should Hold Key Rate as Long It Can

Central Banker Says Colombia Should Hold Key Rate as Long It Can

Posted by Juan Gavasa on October 09, 2014

“To make another adjustment in the short term seems to me inappropriate,” Cano told reporters yesterday in Cartagena. “From the point of view of our mission, which is to control inflation and anchor expectations around the target, there are no reasons to think about a course of action other than to keep the rate at its current level of 4.5 percent, hopefully for as long as possible.”

The central bank left its policy rate unchanged last month after five consecutive quarter-point increases, arguing that a weak global economy and falling oil revenues are offsetting strong domestic demand. Cano and his colleagues on the bank’s seven-member board will raise the rate to 5 percent by March, according the majority forecast in the most recent central bank survey of economists.

“A risk that can’t be discounted is that the output gap, which is the difference between observed GDP and its potential, which now is very near to being closed, could return to negative territory sooner rather than later,” Cano said. “If our forecasts, models and surveys indicate that, the policy response will obviously have to reflect it, with enough anticipation, in a new change of posture toward an expansionary phase.”

Cano said the policy rate is currently around a “neutral” level, that neither stimulates nor cools growth.

Misaligned Peso

Annual inflation will accelerate to between 3 percent and 3.4 percent by the end of the year, Cano said, from 2.86 percent in September. The central bank targets inflation of 3 percent, plus or minus one percentage point.

“There are signs that give us a lot of tranquility on the inflation front,” Cano said. “The pass-through of the peso’s devaluation on inflation in Colombia isn’t very high. Personally, I’m not worried about that.”

Even after weakening to a seven-month low today, the peso remains stronger than its equilibrium rate, Cano said. At last month’s policy meeting, the central bank’s board voted to pare dollar purchases, pledging to buy a maximum of $1 billion in the fourth quarter after purchasing $2 billion between July and September.

“I’m delighted that we have a process of devaluation now, because it seems to me that it will help mitigate the widening in the current account deficit, and strengthen industry and agriculture,” Cano said. “We are still misaligned from what the models indicate is the equilibrium rate. We are still stronger than that level.”

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