February 5, 2020 / 9:19 PM / 13 days ago

Colombia's central bank sees GDP growth close to potential, paving way for rate rise

BOGOTA, Feb 5 (Reuters) - Colombia’s economy grew close to its long-term target in 2019, the country’s central bank said on Wednesday, adding it expects that trend to continue for the next two years, prompting a likely increase in the benchmark interest rate.

The central bank has maintained borrowing costs at 4.25% since April 2018 in a bid to provide stimulus to Latin America’s fourth-largest economy. It forecasts the economy grew by 3.2% last year.

For 2020 and 2021 the bank expects gross domestic product (GDP) growth of 3.3%.

“In 2020 and 2021 excess production capacity will continue to fall. GDP growth will exceed that of potential GDP and the gap between them will shorten over the two-year period,” the bank’s technical team said in a report.

A recent poll by Reuters found the market was divided between those betting on the bank keeping the rate steady this year and those who are expect it to rise by between 25 and 75 basis points.

The path for a potential rate rise is similar to the one predicted by some analysts, who expect stability until the second or third quarter of the year before a rise happens, said Hernando Vargas, the general manager of the bank’s technical team.

In 2020 the bank expects to see a recovery in external demand, not accounting for the possible effects of coronavirus on markets, Vargas told journalists.

“However, rates (of recovery) will be lower than previous averages,” he said. “The last risk factor is the coronavirus, but I won’t say anything on that because I don’t know anything.”

The timing, size and speed of rate changes will be decided based on internal demand and how quickly the gap between GDP growth and potential GDP closes, as well as the effects of external events on the exchange rate and inflation, the report added.

“The central bank is presenting guidance aligned with the market average, although the central scenario for the year is one of stability,” said Banco de Bogota chief economist Camilo Perez. (Reporting by Nelson Bocanegra and Carlos Vargas Writing by Oliver Griffin Editing by Jonathan Oatis)

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