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BOGOTA, April 30 (Reuters) – Colombia’s central bank board kept the benchmark interest rate at 1.75% for the seventh consecutive month in a majority decision on Friday, amid controlled inflation, and raised its 2021 economic growth projection.
The bank increased the GDP projection for this year to 6%, from 5.2% previously, on better-than-expected first quarter economic performance.
“However, the appearance of outbreaks of the pandemic, of uncertain intensity and duration, as well as the uncertainty on the fiscal front, could alter this projection,” said board chief Leonardo Villar.
The impact of a current third wave of coronavirus infections will likely have less impact than previous waves, he said.
But he warned there could be negative impact if a controversial tax reform proposed by the government is not approved by congress.
The reform, which faces stiff opposition from lawmakers, includes the elimination of certain sales tax exemptions and increases on duties for individuals and businesses.
“If the fiscal adjustment required is not achieved, it could compromise access and increase the cost of public financing, which would limit monetary policy space to continue supporting economic recovery and employment,” Villar said.
The government this week lowered the amount of money it hopes to raise from the reform. The proposal has inspired protests around the country.
The administration of President Ivan Duque is now looking to raise between 18 trillion and 20 trillion pesos ($4.8 billion to $5.3 billion) from the reform.
Inflation will likely converge to the bank’s long-term target rate of 3% at the end of this year or beginning of next, Villar said.
Analysts have predicted short-term holds in the rate.
But inflationary pressures and opposition to the proposed reform may motivate rate increases next year.
“We think that the central bank will hold off from rate hikes until early 2022,” Capital Economics said in a note released before the decision. “But with fiscal concerns likely to linger, and possibly intensify, the risks are skewed towards an earlier tightening cycle.” (Reporting by Nelson Bocanegra, Julia Symmes Cobb and Oliver Griffin Writing by Julia Symmes Cobb; Editing by Aurora Ellis)
