Bloomberg News

Colombia Keeps 4.5% Rate to Gauge Effect of Europe Crisis

September 30, 2011

(Updates to add comment in third, fifth paragraphs; auctions in sixth-ninth paragraphs.)

Sept. 30 (Bloomberg) -- Colombia’s policy makers kept borrowing costs unchanged for a second straight month and ended a dollar-purchase program as slowing inflation gives them leeway to gauge the impact of the European debt crisis on global growth.

The seven-member board, led by bank chief Jose Dario Uribe, kept the overnight rate at 4.50 percent today, matching the forecasts of all 27 economists surveyed by Bloomberg.

“We have this balance of a weaker world economy, and a Colombian economy that is the same, or even stronger than we thought it would be,” Uribe told reporters in Bogota after announcing the board’s decision. “Therefore, we thought it appropriate to leave rates unchanged.” He said that there is a “high probability” that the economy will expand 4.5 percent to 6.5 percent in 2011.

Policy makers voted unanimously last month to leave the key lending rate unchanged for the first time in seven months, noting uncertainty about the “size and duration” of a worldwide slowdown, according to minutes of the meeting published Sept. 2. Brazil last month followed Turkey in lowering interest rates as policy makers seek to shield their economy from the European debt crisis.

“The international environment has deteriorated in the weeks after the last Board,” the central bank said in a statement on its website. “Concerns about sovereign debt problems have grown and growth forecasts in the U.S. and Europe in 2011 and 2012 have been revised downwards.”

Peso

In addition to voting to pause again, Banco de la Republica ended a program of purchasing a minimum of $20 million daily after a rout in global markets wiped out the peso’s gains this year. Instead, the bank will begin buying and selling dollars in auctions to curb the peso’s volatility.

The bank will auction $200 million in the spot market when the currency moves more than 2 percent above or below its 10-day moving average, the bank said in a statement today.

The bank said the measure was a response to “extreme volatility” in financial markets.

The peso fell 0.8 percent to 1,931.98 per dollar today from 1,917.65 yesterday. In the year to date, it has weakened 1.3 percent, the eighth-best performance against the dollar among 25 emerging market currencies tracked by Bloomberg.

Since mid-July, the peso has declined 9 percent, the 11th- worst performance against the dollar among the 25 emerging market currencies tracked by Bloomberg. In the region, Brazil’s real has lost 16 percent in that period, the worst performer among the 25 emerging market currencies.

Finance Minister Juan Carlos Echeverry has indicated a peso about 1,900 is near its equilibrium level.

Rate Horizon, Growth

Colombian President Juan Manuel Santos, who asked the central bank to refrain from raising rates further after consumer prices unexpectedly fell in August, met with business representatives this week to discuss measures to guard the $288 billion economy from a possible global recession.

Still, a majority of Colombian analysts forecast policy makers will raise their key rate by 50 basis points to 5 percent by year-end, according to a central bank survey published Sept. 13. None of the 38 economists surveyed expect a rate cut this year.

‘Good” Pace

Latin America’s fifth-largest economy is expanding at a “good” pace amid strong domestic demand and increased lending, the central bankers noted in a statement accompanying last month’s decision. In July, they raised their forecast for Colombia’s growth this year to as high as 6.5 percent.

Gross domestic product rose 5.2 percent in the second quarter from a year earlier, according to a Sept. 22 government report, the second-fastest pace in three years.

Retail sales surged 11.8 percent in July, for a 15th straight month of double-digit growth. That’s its longest run in a decade.

The urban unemployment rate in August fell to 10.4 percent, matching the November 2008 level, the statistics agency reported today.

Annual inflation quickened to 3.42 percent in July, the fastest since June 2009, before slowing to 3.27 percent in August. The central bank targets inflation of 2 percent to 4 percent this year.

“Leading indicators including bank lending and retail sales show demand remains strong,” said Francisco Chaves, an analyst at Bogota-based brokerage Corredores Asociados SA, who forecasts the key rate will be raised to 5 percent by year-end. “If you continue with an expansive rate under these conditions, you risk fueling inflation.”

Uribe today said that credit growth has “stabilized at a high level.”

--With assistance by Matthew Bristow, Heather Walsh in Bogota. Editors: Robert Jameson, Jonathan Roeder

To contact the reporter on this story: 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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