Colombia’s central bank 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,
reduced the interbank rate by 1 percentage point to 5 percent,
matching the expectations of 20 of 29 economists surveyed by
Bloomberg. The other analysts forecast smaller cuts of 0.5 point
to 0.75 point.
The bank is trying to spur consumer demand after Latin
America’s fifth-biggest economy contracted in the fourth quarter
of 2008, the first drop since 1999. Gross domestic product
probably shrank again in the first three months of 2009, helping
slow annual inflation and allowing the central bank to continue
its rate-cutting cycle, Uribe has said.
“Growth remains very troublesome, and inflation
expectations and actual inflation are performing much better
than expected,” said Alberto Bernal, head of emerging markets
research at Bulltick Securities Corp.
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.
“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.
At 5 percent, the rate is 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.
“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.
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 Bernal.
“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.”