Colombia Raises Rate to 4% as Bank Loans, Consumption Spur Economic Growth.

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Colombia’s central bank raised its borrowing costs for a fourth month to cool inflationary pressures as bank lending and consumer spending fuel faster- than-expected economic growth.

The seven-member board, led by bank chief Jose Dario Uribe, increased the benchmark interest rate by a quarter point to 4 percent today, meeting expectations of all 25 economists surveyed by Bloomberg.

Pressure built on policy makers to keep inflation expectations anchored around their 3 percent target as economists at Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. boosted their growth forecasts. The bank increased the rate because of “the possible pressure on prices” and “strong” economic growth,’’ said Camilo Perez, head analyst at Banco de Bogota SA.

Policy makers last month said “extremely low” borrowing costs over a prolonged period could generate risks to financial stability, sustainable economic growth and future inflation in South America’s fourth-largest economy. After pausing at a record-low 3 percent for nine months, policy makers have raised the rate by a quarter point at each of their last three meetings.

Total gross lending rose 20.5 percent to 183.6 trillion pesos ($101.6 billion) in March from a year earlier, according to a report last month by the financial regulator. Industrial output rose 5.2 percent in March from a year earlier while retail sales picked up 14.6 percent.

Capital Controls

Uribe, speaking in Rio de Janeiro on May 27, said he´s “very satisfied´´ with the effect of the country’s dollar purchasing program and that capital controls aren´t needed now to ease gains by the country’s currency.

The peso has gained 5.6 percent this year yesterday and 20 percent over the past two years to 1,807.54.

Both Uribe and Finance Minister Juan Carlos Echeverry have said the costs of imposing capital controls right now outweigh the benefits.

‘‘The persistence of the peso at around 1,800 will motivate the bank to maintain its purchases,” Interbolsa SA, the nation’s biggest brokerage, said in a May 25 report.

Dollar inflows from rising foreign direct investment have contributed to the stronger peso. Foreign direct investment rose almost 50 percent to $3.23 billion in the year through March from the same period a year earlier, with 86 percent going into oil and mining, according to the central bank. The government forecasts FDI to reach $8 billion this year and $13 billion in 2014.

Inflation, Growth

Economists are optimistic policy makers can keep inflation under control this year even as economic growth strengthens. Prices are expected to rise 3.10 percent this year, according to a central bank survey of 39 economists published May 11. That’s less than the 3.31 percent forecast in an April survey and down from 3.61 percent in February.

Expectations for consumer price increases in 2012 have also fallen steadily since February, bolstering Uribe’s claim that inflation will stay around 3 percent this year and next.

Annual inflation eased to 2.84 percent in April, from an annual 3.19 percent the previous month, and up from a decade-low of 1.84 percent a year earlier. Colombia’s real interest rate after inflation, at 0.91 percent, is tied with Peru’s as the lowest in Latin America among nations that target inflation.

5% Expansion

While economic growth will likely be affected by torrential rains and flooding over the last several months, gross domestic product will likely expand close to 5 percent in 2011, Uribe said.

“Activity indicators continue to show that the Colombian economy is recovering so the bank should continue with its policy normalization cycle,” said Munir Jalil, chief economist at Citigroup’s Colombia unit, in a telephone interview.

JPMorgan earlier this month raised its 2011 economic growth forecast for Colombia to 4.9 percent, up from 4.5 percent, after the most recent retail sales and industrial production figures beat expectations.

Goldman Sachs this year has raised its forecast to 5.5 percent from 4.6 percent, while Morgan Stanley has raised their forecast for growth to 4.9 percent from 4.4 percent.

Industrial output rose 5.2 percent in March from a year earlier while retail sales jumped 14.6 percent. Exports soared 47 percent in March and imports gained 40 percent. Total gross lending rose 21 percent to 183.6 trillion pesos ($102 billion) in March from a year earlier, according to a report last month by the financial regulator.

Fuente: Bloomberg.