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Colombia central bank holds interest rate steady as inflation remains high

[BOGOTA] Colombia's central bank held its benchmark interest rate unchanged on Friday as policymakers attempt to quell stubbornly high inflation even as economic growth slows.

The seven-member board voted unanimously to maintain the lending rate at 7.75 per cent for a third month after raising it 325 basis points over the course of a year to ease inflationary pressure.

The bank has sought to ease inflation even as economic growth slows amid a slump in crude oil prices. The bank on Friday cut its economic growth estimate for the year to 2 per cent from 2.3 per cent.

Consumer prices have begun to fall after reaching nearly 9 per cent in July. They will probably continue to recede now that a prolonged drought, truckers strike and currency depreciation, which lead to spikes in consumer prices, have eased, the bank said.

"The effects of strong temporary supply shocks that diverted the inflation target are beginning to dilute at a slightly higher rate than expected. This is indicated by the slowdown in food CPI and the recent behaviour of prices most impacted by the last strong nominal depreciation," the bank statement said.

Inflation reached 7.27 per cent for the 12 months ending in September, down from a high of 8.91 per cent in July, but still well above the bank's long-term target range of between 2 per cent and 4 per cent.

Food prices, which make up about 30 per cent of the inflation index, should continue to fall until at least the first quarter of next year, policymakers said.

In a Reuters poll published on Monday, all 15 analysts expected the interest rate to be held this month. Three said policymakers would begin cutting the rate in November or December.

Finance Minister Mauricio Cardenas said a rate cut would need to wait.

"When there's total certainty that next year's inflation is within the target range of 2-4 per cent, that's when we can start adopting measures to cut the interest rate," said Mr Cardenas, who represents the government on the board.

The government recently presented a tax reform aimed at raising billions of dollars in the coming years to make up for lost oil revenue and preserve its investment-grade credit rating.

The reform would raise the value-added tax to 19 per cent from 16 per cent, excluding basic products like food and medications.

"Given the negative effects of falling oil prices on public finances, the proposed structural tax reform presented by the government to Congress is a fundamental action that contributes to long-term growth," the bank said.