Colombia will use monetary policy to boost economic growth back to its full potential as it seeks lift inflation to the midpoint of its target range, the central bank said today.
With the economy now operating below full capacity, Colombian consumer prices will probably increase less than the central bank’s 3 percent target this year, central bank Governor Jose Dario Uribe said today. The annual inflation of 2 percent seen in January is too low, Uribe said.
“We don’t want inflation to remain at 2 percent forever,” Uribe told reporters in Bogota, after presenting the central bank’s quarterly inflation report. “We want inflation of 3 percent, and of course we take into account that it can’t stay at 3 percent permanently.”
The central bank cut its policy rate a quarter point for a fifth time since June last month, to 4 percent, the lowest among major Latin American economies, after industrial output slumped and inflation slowed to its lowest level since 2010. Another interest rate cut at the central bank’s Feb. 22 policy meeting is now a “done deal”, according to Camilo Perez, head analyst at Banco de Bogota SA, the nation’s second-biggest bank.
“There’s a very high chance, it’s a done deal, that the central bank is going to cut another quarter point at their next meeting,” Perez said after the release of the minutes of the last meeting today. “They make it explicit that they see a need for a bigger monetary policy expansion, but that they didn’t vote for this because there’s still some uncertainty over the future evolution of the economy.”
Asked if there is any reason why the central bank might not continue to cut borrowing costs, Uribe said that policy makers take account of asset prices and credit growth when they set policy, and will react if they see people taking on too much debt.
At least two of the seven board members called for deeper rate cuts last month after economic growth and inflation slowed, the minutes to the bank’s January policy meeting showed.
“Monetary policy actions are directed so that in 2013, output is close to the economy’s productive capacity, without putting at risk the inflation target or the macroeconomic stability of the country,” policy makers said in the minutes.
The policy makers who voted for a half-point cut last month cited the damage the strong peso is doing to the nation’s industry, and the likelihood of a devaluation in the currency of Venezuela, the biggest market for Colombia’s industrial exports. Venezuela devalued its currency five hours later, to 6.3 bolivars from 4.3 bolivars per dollar.
A majority of the board judged that “although a more expansionary monetary policy is needed, the uncertainty over the future evolution of internal demand and the chance of exacerbating imbalances previously accumulated by the economy, above all in an environment of ample global liquidity, suggests the appropriateness of prudence in policy measures,” according to the minutes.
Industrial output slumped 4.1 percent in November from the year-earlier period, the biggest decline since July 2009.
At its January meeting, the central bank also said it would boost dollar purchases to at least $30 million a day and will buy at least $3 billion between February and May. Finance Minister Mauricio Cardenas has said repeatedly that he wants to weaken the peso to 1,950 per U.S. dollar. The peso gained 0.2 percent to 1,788.75 per dollar today.
Uribe said the peso has so far weakened less than he expected. The currency has depreciated 0.8 percent this month, the biggest fall among seven major Latin American currencies tracked by Bloomberg.
Foreign direct investment could fall in 2013 from the record $16.7 billion last year, he said.
Annual inflation eased to 2 percent last month, from 2.44 percent in December, the slowest pace since April 2010. The result was lower than all 25 forecasts in a Bloomberg survey, whose median estimate was for inflation of 2.22 percent, and takes inflation to the lower bound of its 2 percent to 4 percent target range.
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