Colombia - Economic Briefing July 2004

Economic Growth Strong but Moderating  (continued)

Inflation spikes amid pick up in economic activity
In June, consumer prices rose 0.60%, which was up from the 0.38% increase registered in May but in line with market expectations.  Price increases were most pronounced in transportation (+1.06%) and housing (+0.79%), while clothing and other expenditure prices actually experienced declines of 0.08% and 0.04% respectively.  As a result of the June reading, annual inflation rose to 6.1% from 5.4% in May.  Consensus Forecast participants expect the current rising trend to revert in the third quarter and anticipate inflation to drop to 5.8% by year-end.  The current inflation estimate is thus still in line but at the higher end of the Central Bank’s 5% to 6% target for this year.  The slight moderation in economic activity next year is likely to ease inflationary pressure, as Consensus Forecast panellists anticipate that annual inflation will drop to 5.5%, which is precisely at the upper margin of the 3.5% to 5.5% Central Bank target range set for 2005.

Interest rates remain low and stable
Despite the notable surge in inflation associated with increased economic activity, monetary authorities continue to keep interest rates low.  In June, the benchmark DTF interest rate dropped 8 basis points to 7.8%.  Consensus participants, nevertheless, expect Central Bank officials to tighten monetary policy in the second half of this year to stem inflationary pressures arising from higher economic activity.  As a result, the DTF interest rate is seen as rising to 8.2% by year-end.  Next year, the Consensus sees the interest rate rising further to 9.0%.

Current account deficit widens in first quarter
In the first quarter, the current account balance recorded a deficit of US$ 722 million, equivalent to 1.8% of GDP.  The deficit was above the US$ 476 million registered in the preceding quarter and above the US$ 626 million deficit observed in the first quarter last year.  The growth over last year’s deficit was the result of a higher deficit in the services balance, while the trade balance remained virtually unchanged.  Moreover, the first quarter trade deficit of US$ 63 million was virtually unchanged from last year’s deficit of US$ 64 million, despite the 10.2% increase in exports.  Imports increased by 6.8% over the first quarter last year.  As a result of the first quarter current account reading, the annual deficit rose to US$ 1.5 billion from US$ 1.4 billion in the final quarter of last year.  Consensus Forecast participants expect the current account deficit to rise further through the end of this year to US$ 1.6 billion, as robust import growth associated with the acceleration in economic activity is likely to outpace the export expansion and prompt a deterioration in the trade balance. 

Capital account surplus broadens sufficiently to cover current account shortfall
The capital account registered a surplus of US$ 946 million in the first quarter.  This was sufficient to cover the current account gap and was well above the US$ 328 million surplus recorded in the first quarter last year.  The surplus widened principally because of a virtual doubling in foreign direct investment but also due to a notable increase in short-term financial flows in the form of loans.