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So far, the economic rebound this year has
been propelled by healthy export growth, whereas domestic demand has
remained subdued. However, currency deterioration over the last six months
and higher fuel prices are driving up inflation, which is forcing the
Central Bank to tighten monetary policy. The combination of higher interest
rates and increasingly sombre growth prospects in key export markets, is
casting a shadow over this year’s outlook. |
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Price pressures persist and Central
Bank adjusts monetary reins
Consumer prices rose 1.15% in April, which was above the 1.05% rate
observed in March. The April figure raised the annual inflation rate to
7.9% from 7.6% in March. Food as well as transportation and communications
prices experienced the strongest monthly increases. Transportation prices
continue to experience upward pressures amid higher fuel prices, while
food costs rose due to less favourable climatic conditions. The April
result brings accumulated inflation for this year to 4.6%, which is coming
close to the 5% (+/- 2 percentage points) target agreed to with the IMF.
The tax increases adopted at the beginning of the year are likely to
continue to provide some upside pressures on domestic prices. If the
current strengthening in the currency persists, the recent increase in
inflationary expectations may subside gradually. The decision of the
Central Bank to raise its official repo intervention rate by a full
percentage point to 7.25% on 28 April is likely to counteract rising
inflation further. Nevertheless, the benchmark DTF rate of 7.7% at the end
of April still remains at a historical low and is likely to require
further upward adjustments this year to stem inflation. According to the
Consensus, the DTF rate will be raised again this year. Participants
expect monetary discipline to bring down inflation gradually.
Nevertheless, the Consensus figure remains well above the official Central
Bank target and was bumped up by a 0.1 percentage point from last month.
Currency stabilizes amid Central
Bank intervention and regional trend
The currency appreciated 2.4% in April, which represented a noteworthy
improvement from the 0.1% depreciation observed in March. Since December
the monthly depreciation rate has steadily eased amid increased Central
Bank intervention. The Central Bank was forced to take action to
counteract mounting inflationary expectations, which were driven upwards
by rising concerns about the pass-through of the recent peso depreciation
to domestic prices. Given that economic growth remains subdued, Central
Bank officials have decided to intervene in the foreign currency market
rather than to choke off the incipient recovery by raising interest rates
significantly from their current historical lows. In late February,
monetary officials had announced their intention to auction up to US$ 1.0
billion in call options denominated in US$ to stem the currency
deterioration. The call options can be exercised once the representative
market exchange rate exceeds the 20 day moving average. Through the end of
April, the Central Bank had sold US$ 600 million in call options, of which
only a quarter have been exercised. The peso also has been bolstered by
the recent increase in international investor interest in emerging market
assets. In addition to the strengthening of the exchange rate, the stock
market has rebounded 5.5% in since the end of last year, while the spread
to US Treasuries of the benchmark composite J.P. Morgan EMBI+ Colombian
sovereign bond has narrowed to 461 - its lowest level observed since
February 2000. The government took advantage of the lower sovereign debt
spreads to raise US$ 250 million in international bond markets on 10
April. Nevertheless, despite the Central Bank’s monetary measures and
renewed investor confidence, participants expect the peso to lose ground
throughout the year, with the currency depreciating 4.3% from current
levels to reach 2,994 pesos to the US$ by year-end.
Pace of industrial recovery
uncertain as official figures contrast with private sector estimates
In previous years, the export-oriented industry has provided a strong
boost to economic recovery. The more competitive exchange rate and
improved credit setting promise to drive up output again this year. In
fact, according to the National Statistical Institute (DANE), real
industrial output rose 5.0% in February over the same month last year,
which was down just a notch from the 5.9% expansion observed in the
previous month. However, the official statistics contrast sharply with
data from the major private sector industry survey conducted monthly by
the National Industrial Association (ANDI), which showed that output
growth reached just 2.6% for the same period as a result of the export
slowdown in the wake of the virtual standstill of sales to Venezuela,
where currency controls and depressed domestic demand are halting
shipments from Colombia. Furthermore, the industry survey indicates that
heightened security concerns have prompted businesses to scale back
investment plans. The uncertain picture for industry this year does not
bode well for economic performance. |
