Central Bank cuts benchmark rate to 9% to fight economic slump

Colombia’s central bank cut its
benchmark interest rate Friday for a second month as it seeks to spur
consumer spending and revive a slumping economy. 

Policy makers reduced the interbank rate to 9 percent from
9.5 percent, matching the forecast of 29 of 39 economists
surveyed by Bloomberg. One analyst expected the rate to stay
unchanged, while the others forecast decreases ranging from a
quarter point to a full percentage point.

Today’s decision follows calls by President Alvaro Uribe for
lower lending rates to kick-start the economy. Before December,
when policy makers reduced the rate by a half point, the first
cut in three years, the bank had maintained borrowing costs at a
seven-year high to keep a lid on inflation that exceeded its

“The economy took a tumble in the fourth quarter along with
the rest of the world,” said Alberto Bernal, head of emerging-
market strategies at Bulltick Capital Markets in Miami.

Before December’s cut, the seven-member board had raised
lending rates 16 times since mid-2006 to curb inflation as it
quickened to a seven-year high. Colombian consumers borrowed at
record levels, encouraged by successes in reducing crime and
violence caused by more than 40 years of armed conflict with
rebels. That fueled the fastest economic growth in almost three
decades in 2007, helping to accelerate price increase.

The central bank has said the economy may grow 1 percent
this year, compared with 8 percent in 2007 and a 3.1 percent pace
in the third quarter of 2008, the latest figure available.
Finance Minister Oscar Ivan Zuluaga says the government may have
to review its 2009 estimate for a 3 percent increase in gross
domestic product.

Lower interest rates may prompt businesses to invest and
consumers to buy on credit. Cheaper loans also may spur inflation
by strengthening demand.

“The priority for the bank is now growth since inflation is
receding,” said Carola Sandy, a Latin America economist at
Credit Suisse Group in New York, who estimates the benchmark rate
will end the year at 7.5 percent.

Industrial production fell 13 percent in November from a
year earlier, the biggest fall since June 1999, when an economic
and banking crisis in Colombia shuttered lenders and led the
government to nationalize several banks. Retail sales slipped 3
percent from a year earlier.

Inflation, which peaked last year at 7.9 percent in October,
slowed in November and December. The bank targeted inflation of
no more than 4.5 percent last year.

Economists surveyed by Bloomberg expect annual inflation
will slow to 7.41 percent this month, according to the median
estimate of 22 analysts. The central bank has set an inflation
target this year of 4.5 percent to 5.5 percent.

“The bank has to be conscious of what’s happening in our
economy and the world,” said Paula Gonzalez, an economist at
Bogota-based trust-fund manager Fiducor SA, who expected the cut
to 9 percent.

The peso, which slid to a three-month low of 2,422 per
dollar Friday, may have caused policy makers to consider a smaller
cut, said Rafael de la Fuente, senior Latin American economist at
BNP Paribas SA in New York, in a report before the rate decision. (Bloomberg)

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