Bloomberg News

Colombia Bank Says Some Members See 4.25% Rate ‘Expansive’

July 03, 2011

(Updates with comment, GDP from second paragraph.)

July 1 (Bloomberg) -- Colombia’s central bank said some board members at last month’s meeting considered a quarter-point interest rate increase as “expansive” monetary policy while one called for a pause to prevent stifling economic growth.

Policy makers on June 17 raised the overnight rate for the fifth straight meeting by 25 basis points to 4.25 percent, matching the forecast of 22 of 23 economists surveyed by Bloomberg. The bank met before a report showed that the economy grew faster than expected in the first quarter.

Most members called for the rate increase to help ease growth in consumer credit and reduce the risks of financial imbalance and volatility in interest rates, output and employment, according to the minutes posted on the central bank’s website today. Retail sales in South America’s fourth- biggest economy have surged as bank lending accelerates and unemployment declines. Still, consumer prices remain within the central bank’s target and indicators such as industrial output suggest that slack remains in the economy.

“The board remains clearly divided on the next policy rate moves which increase the likelihood of a tactical rate pause in the very near term -- possibly already in July -- and the adoption of non-rate macro-prudential measures to contain the exuberance of credit growth,” said Alberto Ramos, a senior Latin America economist at Goldman Sachs Group Inc. in a research note to investors.

Policy Balance

Colombia’s economy expanded at the fastest pace in more than three years in the first quarter, according to data released a week after the central bank meeting. The economy expanded 5.1 percent in the quarter from a year earlier, the most since 2007.

“Although some uncertainties have been introduced into the growth of GDP, especially because of external risks and progress of public works projects, available information shows a strong momentum in domestic demand,” the bank cited a majority opinion in minutes of the June 17 board meeting.

One board member called for a pause to the rate increases in June as inflation remains within the bank’s target range of between 2 percent and 4 percent, economic growth is close to its “historic level” and consumer, retail and industrial confidence show signs of waning. The member sought to pause until July when the board could analyze new information.

Annual inflation quickened to 3.02 percent in May, from 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. Urban unemployment in May fell to 11 percent.

Yield Gap, Targets

One other member voted in favor of the increase while raising concern that the interest rate differential between the U.S. and Colombia may be too wide and causing an “alarming” increase in foreign borrowing. He called for macro-prudential measures to be considered going forward to avoid “over using” the interest rate.

A policy maker also noted that “both total and core inflation as well as expectations are controlled and anchored to the goal.”

Overseas loans jumped to $3.9 billion in the year through May, up from $2 billion a year earlier, according to the central bank.

The export and foreign investment boom in the oil and mining industry creates few jobs and is an “unmistakable symptom of Dutch disease,” the minutes cited the board member as saying.

Foreign direct investment jumped to $5.75 billion in the year through May, with 86 percent going into oil and mining, compared with $3.68 billion in the first five months of 2010.

The peso climbed 0.5 percent to 1,762.30 per dollar at 2:06 p.m. New York time, from 1,770.78 yesterday. The currency has jumped 1.8 percent so far this week, the biggest increase since the period ended Jan. 7.

--Editor: Robert Jameson

To contact the editor responsible for this story: Helen Murphy 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;


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