By Peter Murphy and Nelson Bocanegra
BOGOTA Feb 14 Colombia's inflation is likely to rise to between 2.5 and 3.0 percent in 2014, central bank director Jose Dario Uribe said on Friday, with faster economic growth helping lift the indicator from its lowest level since 1955 in 2013.
Inflation fell below the bank's two to four percent target range to 1.94 percent last year despite a comparatively low benchmark interest rate held at 3.25 percent for 10 straight months which stoked economic activity but price increases to a lesser degree.
Uribe said the drop in the peso by 14 percent in the last year versus the dollar would provide a "low" amount of inflationary pressure due to more costly imports, while quickening economic activity would compound price increases further.
"All these factors lead in the direction of inflation approaching three percent over the course of the year, but very probably we will end up below three percent by December," Uribe said, presenting the bank's quarterly inflation report.
The minutes of the rate-setting meeting, held by the bank's seven-member board of directors on Jan. 31 and published on Friday, said members saw inflation on track to reach the 3 percent center of their target range and that the economy would reach its potential growth level over the course of 2014.
The minutes said differences among members persisted over how quickly these changes will take place. Perceptions of how quickly the economy is nearing those points are likely to be key considerations in the board's subsequent rate-setting meetings.
Bumper harvests that held down food prices last year are not expected to be as large in 2014, likely causing faster inflation in that segment which has a roughly one-third weighting in the consumer price inflation index.
The bank held to its existing forecasts for 2013 growth of between 3.7 and 4.3 percent, with four percent the most likely figure. He reiterated the 2014 growth forecast of 3.3 and 5.3 percent with 4.3 percent most likely.
"The economy is picking up ... We've also seen a important recovery in internal conditions, an increase in internal demand in terms of consumption and investment," Uribe said.
The Andean nation is the world's No. 4 exporter of steam coal for power generation, the biggest exporter of washed or mild arabica coffee and is investing heavily to raise its current crude oil output of around one million barrels per day.
Its economy grew 4.2 percent in 2012 and 6.6 percent expansion in 2011, a comparatively strong rate for the region.
Despite a weakening currency, Uribe said the bank had slowed daily dollar purchases to an average $10 million per day versus an average of around $40 million in 2012 and 2013 to plump up its "cushion" against potential external shocks.
The slowing of bond purchases by the United States Federal Reserve has weakened currencies of emerging markets like Colombia as investors pull out some investments in the expectation recovery in developed economies will make their financial assets comparatively more attractive.
Uribe said any sign of a slow-down in China was another external risk for Colombia if the Asian nation's appetite for basic goods and commodity imports slowed.