Bloomberg News

Colombia Output Rebound Tempers Expectations for Lower Rates

August 22, 2012

Colombian industry expanded at its fastest pace in four months in June, ending the contraction that was one of the reasons cited by the central bank in its decision to reduce borrowing costs last month.

Industrial production rose 2.8 percent from a year earlier, the national statistics agency said today, more than all the forecasts in a Bloomberg survey of 20 analysts, whose median forecast was for a 0.1 percent increase. The rise in output came after three straight months of contracting output on a year-on- year basis. Retail sales expanded 4 percent from a year earlier, also exceeding the forecasts of all 20 analysts surveyed by Bloomberg.

Colombia’s central bank last month cut interest rates for the first time since 2010, citing low inflation risks and weaker consumer spending. The better-than-expected June results show that the economy continues to grow strongly, said Francisco Rodriguez, a New York-based economist at Bank of America Merrill Lynch, who expects the central bank to hold its benchmark interest rate unchanged until year-end.

“The economy appears to be growing close to potential,” said Francisco Rodriguez, a New York-based economist at Bank of America Merrill Lynch. “There doesn’t seem to be the type of demand-driven slowdown that would really justify a full-fledged cutting cycle.”

Policy makers cut their benchmark interest rate a quarter point to 5 percent last month, with some board members arguing that the global slowdown justified a half-point cut. Twenty-five of 29 analysts surveyed by Bloomberg forecast a second quarter- point reduction at the bank’s Aug. 24 policy meeting.

‘Possibility’

Juan David Ballen, an analyst at Alianza Valores SA in Bogota, said he is now reconsidering his earlier forecast of a quarter point cut this week.

“This opens the possibility that the central bank board will hold rates,” Ballen said in a telephone interview. “They could hold this month, and then cut again next month.”

Finance Minister Juan Carlos Echeverry said last month’s rate cut marked the end of a “phase of stability” in interest rates and the start of a “phase of reduction.”

In an interview last week, central bank board member Cesar Vallejo said the “key” determinant of interest rate moves is whether gross domestic product is growing faster or slower than its long-term potential rate, and whether it is accelerating or slowing.

Peso, Inflation

Echeverry said today that the government is worried by the impact that the strong peso is having on Colombian industry and agriculture. The Treasury is buying $200 million this week, on top of the $300 million it bought last week, to try to curb the currency’s appreciation, Echeverry said.

The peso has strengthened 6.9 percent this year, the biggest gain of 170 currencies tracked by Bloomberg after the Hungarian forint and the Chilean peso.

Consumer spending growth will probably slow this year, helping to reduce “capacity pressures”, the central bank said in the minutes to its July policy meeting.

Colombia’s annual inflation slowed to 3.03 percent in July, down from 3.73 percent at the start of the year. Colombia targets inflation of 3 percent, plus or minus one percentage point.

The central bank doesn’t draw conclusions from individual months of data, and instead studies three-month moving averages, bank chief Jose Dario Uribe said in a July interview.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; Christine Jenkins in Bogota at cjenkins28@bloomberg.net

To contact the editor responsible for this story: Robert Jameson at rjameson@bloomberg.net


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