Bloomberg News

Colombia Ignores Santos Pressure and Raises Rate to 4.25%

June 17, 2011

(Updates to add analyst comment in sixth paragraph.)

June 17 (Bloomberg) -- Colombia’s central bank raised its borrowing costs for a fifth month, ignoring President Juan Manuel Santos’s call for policy makers to pause and preserve growth.

The seven-member board, led by bank chief Jose Dario Uribe, increased the benchmark interest rate by a quarter point to 4.25 percent today, meeting expectations of 22 of 23 economists surveyed by Bloomberg. Traders are expecting the bank to raise the rate to as high as 5 percent by year-end.

“This increase is meant to maintain inflation within the target range for this year and next and to help avoid future financial imbalances,” the bank said in a statement announcing its majority decision.

The yield on Colombia’s benchmark short-term bond due August 2012 has risen 23 basis points to 5.21 percent since Santos made on May 31 what he called a “respectful request” for policy makers to hold the key rate at 4 percent. The gap between yields on the securities due 2012 and the nation’s bonds due 2024 shows that borrowing costs need to rise further to control inflation that breached the 3 percent midpoint of the bank’s target range in May, according to Interbolsa SA’s Pedro Ospina.

“Independently of what Santos says, the bank will continue to lift” rates, said Ospina, a fixed-income analyst at Colombia’s biggest brokerage. “Santos’s remark is entirely political. He wants to appease businesses and distance himself from what some see as an unpopular decision.”

Probe, Rate Outlook

Absent from the statement this month was wording from previous months “the move toward a less expansive monetary policy must continue,” indicating next month there might be a pause, said brokerage Correval SA in a statement.

Uribe said the government will investigate why a report about the rate decision, correctly predicting the increase, appeared on the news website Portafolio before being announced publicly. Central bank spokeswoman Maria Andrea Diaz said she spoke with the company’s director and was told that the report was a mistake.

Today’s rate increase is likely to anger businesses on concern growth will slow and also exporters who say higher rates attract more investment behind the peso’s 6.5 percent rally this year.

Economists expect a year-end benchmark rate of as high as 5 percent, as indicated by the average estimate of 4.82 percent in a central bank survey published last week.

Presidents, Exporters

Pressure has been building on Santos to slow the pace of rate increases by exporters who are worried that higher rates could attract more investment to the Andean nation that’s behind the biggest rally this year among the six most-traded Latin American currencies tracked by Bloomberg.

Colombia’s biggest business association, known as ANDI, said in a May 31 e-mailed statement that a new increase in rates is “inconvenient.” Rate increases are determined “with models that seem not to consult with the country’s reality,” ANDI said.

“Exporters are worried about rate increases because they widen the spread even further between Colombia and developed nations, bringing in more cash and pressuring the peso,” said David Aldana, an analyst at Ultrabursatiles SA brokerage.

Former President Alvaro Uribe frequently urged the bank to take steps to weaken the currency. Santos’s predecessor argued that the strong peso forced exporters to cut jobs as they received fewer pesos for goods such as flowers and coffee sold abroad.

‘Practically a Given’

The central bank, founded in 1923, has been independent under the constitution since 1991, when it was given the mission of fighting inflation. Finance Minister Juan Carlos Echeverry who is also president of the central bank’s seven-member board, has one vote in the rate decision.

Elsewhere in the region, the central banks of Chile and Peru are also independent of the government. Banco Central do Brasil, while in practice operates autonomously, doesn’t enjoy formal independence.

Citing the delayed effect of interest rate increases on consumer spending and prices, and the likelihood that South America’s fourth-biggest economy is operating near its potential, the central bank said in minutes of the May 30 monetary policy meeting that “the Board of Directors felt the move toward a less expansive monetary policy must continue.”

Calm, Flattening

With its emergence from recession in 2009, Colombia’s economy has expanded for seven consecutive quarters. According to the median forecast of 14 economists surveyed by Bloomberg, the $285 billion economy grew 5 percent year on year in the first quarter. The national statistics agency publishes its first quarter growth report June 23.

Colombia’s economy “isn’t overheating, it’s warming,” Echeverry said after the decision was announced.

Surging foreign investment in its mining and energy industries will boost annual economic growth to as high as 6 percent this year, according to the government, from 4.3 percent in 2010, building pressure on the central bank to keep inflation expectations anchored around its target.

Annual inflation quickened to 3.02 percent in May, from a 2.84 percent the previous month, and up from a five-decade low of 1.84 percent a year earlier. Colombia’s real interest rate after inflation, at 0.98 percent, is the lowest in Latin America among nations that target inflation.

The annual rate was “mainly explained by an increase in food prices,” the bank said in its statement today.

Core Inflation

Core inflation, which excludes food prices, slowed to 0.09 percent in May compared with 0.14 percent a year ago, bolstering confidence the central bank will keep consumer price under control.

“The market is calm regarding 2011 inflation readings,” said Ricardo Bernal, head analyst at Bogota-based brokerage Serfinco SA. The bank “still needs to continue raising. With real interest rates at such low levels, you can’t expect the economy to continue growing without pressuring inflation.”

The gap between yields on the government fixed-rate bonds due July 2024 and the securities due August 2012 dropped to 258 basis points, or 2.58 percentage points, on June 15. That’s its lowest level since Feb. 2, 2010.

“The TES curve still has room to flatten,” said Ospina, who forecasts the gap may fall to 230 basis points within a month.

--Editors: Robert Jameson, Bill Faries

To contact the reporters on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net; Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net; David Papadopoulos at papadopoulos@bloomberg.net


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