Colombia central bank looks set to maintain expansive policy

Posted on Jan 5 2014 - 7:44am by Rico

(Reuters) – Colombia’s central bank indicated it could maintain its current expansive monetary policy in the months to come, minutes from its December rate-setting meeting showed on Friday, as inflation remains low despite quickening economic growth.

The bank held the benchmark interest rate at 3.25 percent for the ninth straight month at the Dec. 20 meeting, a level it perceived to be yielding a sought-after boost to growth which has come in particular through increased consumer spending.

The seven-member board agreed at the meeting that the economy’s potential growth was now likely to be higher than had been estimated given the strength of domestic demand coupled with growth in output.

“Regarding the supply, the performance of production, prices, employment and wages shows positive growth of the potential GDP,” the minutes said.

“This is very likely to stay within the scope of the policy due to the high rates of investment and the effects of the reductions in payroll taxes on the labor markets,” it said.

Colombia’s economy, reliant on commodities like oil, coal and coffee, grew 5.1 percent in the third quarter, beating expectations and accelerating from 3.9 percent and 2.8 percent in the prior two quarters, helping take growth closer to the government’s official target of 4.5 percent for 2013.

Some board members said it was “necessary to evalute the coherence of the monetary policy rate” given the economy’s potential for faster growth and low inflation, which appeared to indicate a willingness to consider a cut to interest rates.

Expanding economic output has failed to bring inflation up even to the lower end of the central bank’s target level of 2 to 4 percent and was an indication, in one member’s view, that the output gap was wider than previously thought.

That output gap, or the economy’s capacity to produce versus what it actually does, was an indication that the economy could sustain faster growth without leading to a rise in prices. That was an argument for holding the current interest rate until mid-2014 at least, until inflation rose to within the target level, the member said, according to the minutes.

The board member was not identified but one member, Carlos Gustavo Cano, made the same comments in a newspaper interview last November.