Colombia Bank May Cut Lending Rate to Record 5% as Growth Slows
Colombia’s central bank will probably cut its benchmark interest rate to a record today in an effort to ward off an extended recession as inflation eases.
Policy makers, led by central bank chief Jose Dario Uribe, will reduce the interbank rate by a full point to 5 percent, according to 17 of 25 economists surveyed by Bloomberg. The other analysts forecast cuts of 0.5 point to 0.75 point.
Latin America’s fifth-biggest economy probably contracted for a second straight quarter in the first three months of 2009 after shrinking in the fourth quarter of 2008, the first drop since 1999. The slump will damp spending, helping slow annual inflation to within the bank’s target, and allow the central bank to continue its longest rate-cutting cycle in more than six years, Uribe has said.
“Internal demand continues to show extraordinary weakness, and that highlights that risk remains on the downside,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York, who expects the lending rate to be 4 percent by year-end. “Inflation will continue to decline and allow aggressive rate cuts.”
Policy makers this year have said the economy is weakening faster than they anticipated. Still, Uribe has cautioned against keeping rates low for too long, saying that by encouraging borrowing they run the risk of fueling inflation. The board targets inflation this year of 4.5 percent to 5.5 percent. The bank has missed its annual target two years in a row.
Colombia’s consumer prices rose 0.32 percent in April from the previous month and the annual inflation rate fell to 5.73 percent from 6.14 percent in March. Inflation ended 2008 at 7.7 percent, the highest year-end rate since 2000.
Inflation Risk
“If the economy improves strongly in the last quarter, low interest rates for too long would be inflationary,” said Jaime Rodriguez at Bogota-based brokerage Asesores en Valores, who expects the board to cut the rate to 5 no fax payday loans.25 percent today.
At 5 percent, the rate would be the lowest since 1998 when the bank began targeting inflation principally through its overnight lending rate.
Surging consumer demand in Colombia since President Alvaro Uribe took office in 2002, pledging to make the nation safe from drug-funded violence, helped drive the economy in 2007 to 7.5 percent growth, its fastest expansion in three decades.
That pace slowed to 2.5 percent last year as the central bank’s 16 interest rate increases in 28 months and the global economic slump choked bank lending and sapped consumer confidence.
Colombian retail sales have fallen for seven straight months through March while industrial production declined for seven months through February. Manufacturing rose 0.4 percent in March from a year earlier when factories were closed for the Easter holiday.
‘Expansionist’ Policy
Finance Minister Oscar Ivan Zuluaga on May 21 said there is still room to cut rates as part of the bank’s “expansionist monetary policy” to bolster economic growth. The government expects the economy to grow 0.5 percent to 1.5 percent in 2009, while the central bank sees growth at slightly above zero.
“The situation is getting better,” Rodriguez said. “We should see improvements in the housing market, which is picking up again, and in the export sector.”
The bank may also acknowledge that the international economic outlook is improving, said Alberto Bernal, head of emerging markets research at Bulltick Securities Corp.
“Credit dynamics appear to be becoming less bearish internationally,” said Bernal, who expects the bank to hold rates when they reach 4.5 percent. “Higher commodity prices will also at some point translate into better growth dynamics.”