Andean Group - March 2008 (ISSN 1741-4466)

The central bank raised interest rates by 0.25 of a percentage point on 22 February to head off inflation. The move brought the benchmark interest rate up to 9.75%. In January inflation was 1.06%, pushing the 12-month inflation rate to 6%. In 2007 inflation was 5.69%.

The move to raise rates is significant because it was taken after a vote by the bank's board on which the finance minister, Oscar Iván Zuluaga, sits. In the run-up to the meeting he had called for the bank not to increase rates but he was overruled. This underlines the independence of the central bank and its worries about a resurgence of inflation.

The outlook for the economy is further complicated by the diplomatic problems with Venezuela. Venezuela has been Colombia's fastest growing export market over the past five years and now ranks second only to the US as a destination for Colombian exports. Figures published on 29 February by the Colombian statistics agency, DANE, show that Colombia's exports to Venezuela jumped by 87% in the first 11 months of 2007.

The key point is that Colombian exports to Venezuela are increasing while those to the US are falling. In the first 11 months of 2007 Venezuela spent US$4.56bn on Colombian goods, mostly cars and car parts. Only US$275m of Colombia's exports to Venezuela were food. On 26 February the Sociedad de Fabricación de Automotores (Sofasa), which builds Toyota and Renault cars in Colombia, announced that it was cutting production in Colombia because of the new lower quotas for imported cars that Venezuela has introduced. The company announced that it would move from operating three shifts a day to two. This means that 374 workers will lose their jobs. The company now expects to build only 55,000 cars this year rather than the 77,000 it originally planned.