Colombia Bank May Cut Rate for Fourth Month as Economy Slumps
Colombia’s central bank will probably cut its benchmark rate for a fourth straight month today in an effort to revive economic growth, Finance Minister Oscar Ivan Zuluaga, a member of the rate-setting committee, said last night.
“From my point of view everyone agrees on reducing the interest rate and the discussion is just over what the number will be in terms of basis points,” Zuluaga said in an interview at his office in Bogota.
Central bank chief Jose Dario Uribe will reduce the interbank rate by a full point to 7 percent, according to 16 of 30 economists surveyed by Bloomberg. The other analysts forecast cuts ranging from a quarter point to three-quarters of a point.
Latin America’s fifth-biggest economy may have expanded at the slowest pace in almost seven years in the fourth quarter of 2008, according to economists surveyed by Bloomberg, while annual inflation has slowed for four consecutive months since reaching the fastest pace since 2002.
“The bank is now focused on propping up economic growth and limiting unemployment,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York. “It has been clear it’s no longer worried about inflation.”
After half-point cuts in December and January, the board last month slashed the overnight rate by a full point, the biggest reduction in almost seven years.
Policy makers, while expressing concern that the economy was slowing more than expected, said the cut didn’t imply similar future reductions, according to the minutes of the Feb. 27 meeting posted on the bank’s Web site March 13.
Inflation Expectations
“The main concern now is how to push the economy because inflation expectations are under control,” Zuluaga said yesterday. “The external signs of the world economy and the local signs of economic growth are very low.”
Colombia’s central bank last cut interest rates at four straight meetings in 2002, when policy makers sought to avert a recession and cut a double-digit unemployment rate amid tame inflation.
Since President Alvaro Uribe took office in 2002, increased bank lending has fueled an expansion of consumer spending that helped accelerate economic growth to 7.5 percent in 2007, the fastest pace in almost three decades.
The bank pushed up borrowing costs to a seven-year high of 10 percent in 2008, which helped check inflation fast cash loans. Now, the global credit crisis has begun to stifle Colombia’s growth, as exports to the U.S. and neighboring Venezuela slow.
Growth Outlook
Bank chief Uribe has said the time is right to lower rates. Plunging industrial output led the central bank to say economic growth in 2009 could slow to between 1 percent and 2 percent, down from its original 5 percent estimate.
Zuluaga, who also is president of the seven-member bank board, yesterday called on the central bank to continue its “expansionary” policy on lending rates at its monthly board meeting tomorrow.
Industrial production has declined for six straight months while retail sales have fallen for five months.
Industrial output fell 10.7 percent in January after dropping 13 percent in November, the biggest decline since June 1999, when an economic and banking crisis shuttered lenders and led Colombia’s government to nationalize several banks. Retail sales slipped 4.5 percent in January.
Zuluaga said the economy will expand this year. Still, in April the government will probably revise its estimate for 3 percent gross domestic product growth after analyzing data that come out next week, he said.
The April revision of gross domestic product likely will be the final change in growth numbers, Zuluaga said.
Peso Rally
“The central bank will cut rates further during 2009 irrespective of the shape of the world or domestic economy and the level of risk aversion,” said Alberto Bernal, head of fixed-income research at Bulltick Securities Inc., who expects the bank to cut the rate to 5.5 percent by year-end.
This month’s rally in the peso may make it easier for the bank to reduce rates following concern last month that the currency’s 12 percent decline in the first two months of 2009 would ignite inflation, Bernal said.
Consumer price increases slowed to an annual rate of 6.47 in February, down from a peak of 7.94 percent in October. The central bank is targeting an annual inflation rate of 4.5 percent to 5.5 percent this year.
The peso has rallied 11 percent this month to 2,338.48 per dollar.