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Central Bank uses dropping inflation
as pretext to lower interest rates but upward pressures looming
Consumer price rose 1.26% in February, driven principally by increased
education spending, which rose +4.0% over January. Nevertheless, the
annual inflation rate dropped to 6.7% from 7.4% in January. The Central
Bank remains confident that price pressures will continue to remain
subdued this year, despite the acceleration of economic activity and the
increased likelihood that food prices may come under some pressure as a
result of the El Niño weather phenomenon. The Central Bank used the
perceived improvement in the inflationary outlook as a pretext to lower
the benchmark DTF interest rate further in February to 10.7% from 11.2% in
January. Consensus Forecast participants are less optimistic about the
monetary setting and expect inflationary pressures to mount as economic
activity accelerates, which, when combined with increased currency
depreciation (the peso is expected to depreciate 8.8% this year versus
2.7% in 2001), will cause an overshooting of the inflation target of 6.0%
set for this year. The Consensus expects the figure to come 0.3
percentage points below last month’s forecast. As a result of increased
price pressures, the Central Bank is likely to be forced to back paddle on
its decision and is seen to tighten monetary reigns by raising the
benchmark interest rate, which is expected to increase by year-end.
Trade balance deteriorates amidst
unfavourable external environment
The trade balance deteriorated substantially last year. The downturn in
the global economy, combined with a slump in prices for key traditional
export products such as coffee and oil, caused exports to plummet 6.3%,
which was down from 13.3% growth in 2000. Both coffee and oil exports
experienced double digit contractions of 28.5% and 33.1% respectively.
The 10.3% growth experienced by non-traditional exports was insufficient
to offset the strong declines in traditional exports. Imports, on the
other hand, grew even faster than in 2000, expanding by 11.2% in 2001
compared to 8.3% growth in the previous year. Robust capital good import
growth of 30.3% provided the backbone of the strong export expansion,
while consumer goods imports expanded at 15.9%. As a result, the trade
balance deteriorated from a US$ 1.6 billion surplus in 2000 to a US$ 544
million deficit. Despite the anticipated acceleration of export growth
this year and a substantial moderation in import growth, participants
expect the trade balance deficit to persist through this year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Colombia. For more details please click here.
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