Central Bank of Colombia follows Banxico and raises its interest rate 50 basis points

The Central Bank of Colombia It increased its reference interest rate this Friday by 50 basis points to 3%, in line with what the market expected, amid higher inflationary expectations.

The decision had the vote of 4 of the seven members of the organism’s board of directors, while the remaining three were inclined to increase it by 75 basis points.

In a recent Reuters poll, the 21 analysts consulted anticipated the magnitude of the increase.

Is about the highest rate since May last year.

The bank manager, Leonardo Villarexplained the increase in the rate of inflation acceleration that surprised to the upside in November, as well as the expectations of prices above the target in 2022 due to a greater percentage increase in the minimum wage.

“Inflation expectations have increased and are above the 3% target, even in the medium term. This implies the risk of inducing indexation processes to higher inflation levels,” Villar said when reading a statement.

Given this, the bank raised its inflation forecast for this year to 5.3% from a previous estimate of 4.9%, as well as that of 2022 to 3.7% compared to a previous 3.6 percent.

The pressures on inflation, which reached 5.26% in the accumulated in 12 months at the end of November, far from the target of central bank of 3%, aim to intensify after the Government agreed with employers and unions a 10.07% increase in the minimum wage by 2022, almost triple that this year.

“The increase in the minimum wage creates a particularly strong challenge for the Banco de la República and for the fulfillment of its constitutional mandate to maintain low and stable inflation,” added Villar.

The official highlighted that the leading indicators show that the GDP continues with an important growth dynamics in the fourth quarter, reaching levels higher than the period prior to the pandemic, for which the technical team ratified its projection of GDP expansion of 9.8% for 2021.

The Finance Ministry raised its economic growth forecast for this year to 9.7%, from a previous estimate of 8.5 percent.

The interest rate accumulates a rise of 125 basis points since September, when the monetary authority began the cycle of increases.

The market expects the next rate hike to be in January and the Reuters poll median placed the indicator at 5% at the end of next year.

Central banks in Latin America are sharply raising the cost of borrowing. Mexico surprisingly raised its rate by 50 basis points on Thursday, also due to concerns about the inflation, while Chile raised it by 125 basis points on Tuesday and Brazil increased it by 150 basis points in their last meeting.