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UPDATE 1-Colombia cenbank hikes rate to 7.75 pct to fight inflation
July 29, 2016 / 8:36 PM / in a year

UPDATE 1-Colombia cenbank hikes rate to 7.75 pct to fight inflation

(New throughout, adds comment and background on inflation, GDP, adds bylines)

By Helen Murphy and Julia Symmes Cobb

BOGOTA, July 29 (Reuters) - Colombia's central bank raised its benchmark lending rate to 7.75 percent on Friday despite a still-sluggish economy, as fast-climbing consumer prices put its 2017 inflation target at risk.

The seven-member board decided to boost the lending rate by 25 basis points, the 11th consecutive monthly increase, meeting the forecast of 16 out of 22 analysts in a Reuters survey last week.

The board's decision was split as some policymakers believe the rate should have been held at 7.5 percent to allow breathing space for the economy, saying increases in consumer prices are seen as temporary.

The bank revised down its economic growth forecast for the year to 2.3 percent from 2.5 percent as low oil prices continue to drag national revenue. The government still sees expansion at 3 percent.

The market had expected the bank to pause its tightening cycle after last month, but annual inflation accelerated to an unexpectedly high 8.6 percent in June.

The increase pushed the rate up a cumulative 325 points since September in an effort to bring inflation within the bank's target range of 2-4 percent next year.

The El Nino drought, a 45-day truckers strike which ended last week, and the weakened peso currency have raised food and energy prices, sending inflationary outlooks higher.

"Although the phenomenon of El Nino ended and the exchange rate has not shown a strong upward trend for months, the intensity of these shocks produced a deviation of inflation and its expectations from the target and triggered some indexation mechanisms," bank chief Jose Dario Uribe read from the statement.

"The effect of the truckers' strike on consumer prices will be felt in July, but is expected to quickly fade."

Finance Minister Mauricio Cardenas, who represents the government on the board, said his position to hold the rate was "shared by a group" of board members.

While consumer prices are expected to head even closer to 9 percent in July because of the strike, the bank sees inflation heading back toward 6.5 percent at the end of 2016 and to 4 percent next year.

"Our sense is that the end of the tightening cycle is near but that a further rise in inflation in July will probably push the board into raising interest rates once more," Capital Economics said in a note to investors.

The current account deficit will be 5.3 percent of GDP this year, the bank said. (Reporting by Bogota newsroom; Editing by David Gregorio)

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