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Outlook
raised in light of favourable economic developments
Consensus Forecast participants remain optimistic about this year’s
growth prospects and the strong first half has prompted another upward
revision to the GDP forecast, with the economy now expected to grow 3.9%,
unchanged from last month’s forecast.
Nevertheless, this means that growth will moderate slightly in the
second half of the year, with the expansion decelerating to 3.7% and 3.9%
in the third and fourth quarter respectively.
The moderation in economic activity will spill over to next year,
when GDP is anticipated to grow 3.7%.
Consumer
price increases moderating rapidly
In
August, consumer prices remained virtually unchanged (+0.03%), which was
up modestly from the 0.03% drop in July and well below market expectations
of 0.40%.
Health, clothing, transportation and education prices were the only
sub-categories to experience modest increases over the prior month, as
most other prices dropped.
As a result of the August reading, annual inflation dropped to 5.9%
from 6.2% in July – the first decline since April.
The current strengthening in the exchange rate is helping to lower
price pressures noticeably, despite the robust pickup in economic activity.
Consensus Forecast participants anticipate that inflationary
pressures are unlikely to abate further this year, however, as strong
domestic demand is likely to exert increasing upward pressure on prices.
Nevertheless, panellists expect annual inflation to reach 5.9%,
which remains within the Central Bank’s target range of 5%
to 6%.
The moderation in economic activity next year is likely to help
keep inflationary pressures at bay.
As a result, Consensus Forecast participants see annual inflation
dropping to 5.5%, which remains on the upper end of monetary officials’
target range of 3.5% to 5.5% outlined for 2005.
Absence
of significant inflationary pressure to maintain low rates
The favourable inflationary trend has enabled the Central Bank to
maintain interest rates at low levels, despite the strong economic
expansion.
In August, the benchmark DTF rate remained virtually unchanged over
the previous month at 7.8%.
At August levels, the DTF rate was 12 basis points below its levels
at the end of last year.
Nevertheless, Consensus Forecast participants expect the rate to
rise in the final months of the year to 8.0%, which is down 0.2 percentage
points from last month’s forecast.
Next year, accelerated currency depreciation and healthy domestic
demand growth are likely to exert pressure on prices and are likely to
prompt monetary authorities to raise the DTF rate further to 8.8%.
Exchange
rate appreciates further
In August, the exchange rate continued along the strengthening trend
observed for most of this year, closing at 2,551 pesos
to the US$ - a 2.7% nominal appreciation over the previous month.
The August strengthening followed a 3.1% appreciation in July.
With the exception of May this year, the currency has appreciated
every month and at the end of August was 8.9% stronger than at the end of
last year.
Central Bank intervention and policy measures adopted by the
Finance Ministry have been unable to stem the currency trend and the
government remains concerned about the detrimental effect that further
appreciation could have on the current export expansion.
A combination of higher international investor appetite for
emerging market assets but also better investment opportunities in
Colombia in particular, as a result of the improved economic and political
conditions, is responsible for the strong currency.
However, Consensus Forecast participants expect the current trend
to reverse, as the currency is seen to depreciate by 7.8% through the end
of the year to reach 2,766 pesos
to the US$.
Next year, the currency will not appreciate further.
On the contrary, Consensus Forecast participants anticipate the
currency to depreciate 5.2% to 2,917 pesos
to the US$ by year-end.
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