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Colombia central bank raises interest rate to 2% By Reuters

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© Reuters. FILEPHOTO: A view from Bogota of Colombia’s Central Bank, October 9, 2019, REUTERS/Luisa Gonzalez/File Photo

By Julia Symmes Cobb and Luis Jaime Acosta

BOGOTA (Reuters) – Colombia’s central bank board raised the benchmark interest rate by 25 basis points to 2% on Thursday, its first change to borrowing costs in a year, as it seeks to control inflation.

This decision was supported by four board members and is comparable to regional counterparts.

Other board members supported an increase of 50 base points.

Inflation and GDP were also raised by the bank, with growth forecasts rising to 8.6% (from 7.5%) and inflation at 4.5% (from 4.1%).

It is the first rate change since July 2016 as well as the first move in over a calendar year.

In order to support economic recovery during the COVID-19 epidemic, the board lowered borrowing costs by 1.75% last year.

The main reason for increasing the rate was a significant increase in consumer prices during recent months. In August, inflation reached 4.44%. This is well above the target range from 2% to 4.4%.

Leonardo Villar was the board’s chief of staff. He stated, “We are simply responding to what we see in the current circumstances,” and that the reduction of monetary stimulus is necessary to combat the effects of the pandemic.

Villar explained that the high level of economic growth, as well as inflation numbers could have a negative impact on inflation in future. Therefore it was necessary to begin a cycle reducing monetary stimulus and increasing interest rates.

In a statement, the board said that the outlook for the future is uncertain as a result of the pandemic.

Villar added that the board recognizes the danger that inflation expectations may drift from target and become a permanent phenomenon.

Analysts believe that the board would continue to raise rates throughout the year. This will result in borrowing costs dropping to 2.50% by December.

In a Reuters poll, fifteen analysts predicted a 25-basis point rise while two forecasted a 50 basis-point increase.

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