beyondbrics

How do you say Whoa Nelly – slow down! in Spanish?

Faced with strong growth, rising inflationary pressure and soaring consumer credit growth, Colombia’s central bank responded on Friday by raising lending rates once again.

For the second time in as many months, the bank upped its benchmark interest rates by 25 basis points to 5.25 percent, bucking the trend in the region, which has been to hold or cut rates.

In a statement posted on the central bank’s webite, policy makers said concerns that the economy might be overheating and worries over the pace of credit growth were behind its decision to continue tightening monetary policy.

“In the long term, excessive growth of credit or of the price of some assets could be a source of financial imbalances with negative consequences on the sustainability of output growth and employment,” central bank chief Jose Dario Uribe said after announcing the rate increase.

With inflation in the 12-month period through January running at 3.54 per cent (against a target of 2 to 4 per cent) and economic growth projected to be between 5 to 6 per cent this year, the central bank is right to be concerned.

But the rate hike is unlikely to endear it to the country’s beleaguered exporters.

While a decade-long military offensive against illegal armed groups has made it safer to do business, the flood of foreign investment into the Andean nation and the subsequent boost it gave to the economy is proving to be a mixed blessing for policy makers.

Strong growth and investment flows have helped double disposable income per capita from $3,400 in 2006 to $6,700 last year and bolstered the country’s lending and housing sectors, with price indices of new and used housing at their highest records.

But the same factors that have given Colombia its rising star economy status have also driven up the peso, 9.7 per cent higher against the dollar since the start of the year. The fast appreciating peso in turn has become something of a headache for the country’s flower and banana exporters, two of the biggest employers of rural Colombians.

Only this week, the head of the country’s banana exporters’ association said that “an important percentage” of 110,000 jobs in the industry were at risk as plantations struggled to pay labour and production costs in pesos while receiving revenues in US dollars.

Exporters said rate hikes could bring in the kind of speculative capital seen in Brazil and further strengthen the currency.

In response, the central bank started intervening in the FX market. On Friday, the bank said it was extending a programme of buying at least $20m daily that was to end in May to August 4 or later. It is also looking at measures to slow consumer credit growth.

But whether the country’s cocktail of higher interest rates, FX intervention and curbing consumer credit is the right one remains to be seen.

Benito Berber, analyst at Nomura Securities, expects further rounds of tightening.

BanRep has sent a clear message to the market since early 2011: It is looking at the underlying macro economic factors of its own economy as the main guidance for monetary policy actions. BanRep is not looking to the level of the exchange rate, the recent inflation dynamics, or even the crisis in the eurozone as drivers for policy rate changes.

Since the domestic demand is red hot, consumer confidence is super strong, credit to consumer is growing robustly and housing prices are at historic highs,  BanRep has continued to hike. And guess what? Expect BanRep to continuing hiking if the economy does not slow down.

He concluded:

Colombia has done everything right in the past years: it has reduced violence which has supported domestic consumption, it has strengthened fiscal accounts, increased FDI, its central bank is gaining credibility by the hour, and on top of that, the economy is enjoying a positive terms of trade shock. As a result of these factors, the COP is heading to 1,650 in the next couple of years in our view and not even President Santos will stop it.

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