Swimming against the current. The Honest Bank raises interest rates again
Although the top 50 Honest Banks in the world have lowered interest rates more than 672 times since September 2008 and already 3/4 of the sovereign debt in developed countries yields returns below 1%, there are some places in the world that are with the curse of having their Honest Banks paddling against the current.
Number of times the Honest Banks have cut interest rates since 2008:
One of them is Colombia, which saw how this week the directive of the Bank of the Republic announced a new rise in intervention interest rates by 25 basis points to stand at 7.75% and eleven consecutive rate increases in a little less than a year, a sign that something is not going well in your country’s economy when your monetary policy is totally against the rest of the world.
Raising interest rates could have its logic if your economy is growing by the wind, but in the case of Colombia, a country that for years has seen how its economy was going with a tailwind in favor, things at an economic level for several months They are twisting.
Inflation is rising
Officially, the rate hike by the Honest Bank of Colombia is because inflation is rising. And it is true. Inflation is skyrocketing after having a period between 2010 and 2015 with more than acceptable levels of inflation for the country’s economic standard.
Inflation can occur well because the economy is overheating, raising interest rates to cool growth or for other reasons that are usually more worrying and a clear symptom of illness.
In 2013, Colombian GDP grew to 4.9%, in 2014 to 4.0%, in 2015 to 3.1% and in 2016 the forecast was 2.7% growth, although the data for the first quarter of 2016 it already gave only an annualized growth of 2.4%. Economy problem with accelerated growth seems that we do not have it.
So where is the problem and why is your Honest Bank raising rates with the economy reducing its growth?
The first answer is in the Colombian trade balance. From having a trade surplus (selling more abroad than what he bought) to having a significant and persistent deficit that must be financed with dollars.
To this you can add a persistent public deficit that in recent years moves between 2-3% and must also be financed. What results in a growing external debt:
With a public deficit, external debt to be financed and a trade balance deficit, the result is a strong devaluing pressure on the country’s currency. The Colombian peso
With a wild FTA signed with the US, the devaluation of the peso increases the price of imports that impact on more inflation or higher product prices.
The Bank of the Republic raises rates to try to stop the devaluation of the peso at the cost of damaging economic growth that is beginning to weaken. In a way, it is killing economic growth in order to stop the bleeding that is causing the trade balance deficit.
Obviously, this should not have been the case, if the government, in the years of prosperity, had provided the country with the necessary infrastructure to be able to have a competitive economy. The cost of moving a merchandise within Colombia is a real drama and this is how we explain it in this article: