Colombian central bank director
Carlos Gustavo Cano said he disagreed with the board’s decision
to raise interest rates this year as inflation showed signs of
slowing and said the bank’s next move will be to cut rates.
Cano, one of seven board members who decide monetary
policy, said he had “discussions” with his colleagues over
lifting the lending rate in February and July, after maintaining
“unanimity” over 14 previous increases beginning April 2006.
“I said let’s wait and see what happens with world
inflation, which I thought would begin to decline, and let’s
wait to see the effect of the global recession,” Cano said in
an interview at his office in Bogota. “I went along with the
decision, finally, because it’s the law of the majority.”
Cano, 62, said the board is now in agreement that the next
move will be to cut interest rates from a seven-year high of 10
percent. Fourteen economists in a Bloomberg survey ahead of next
week’s board meeting are divided: seven expect the bank to keep
rates unchanged and seven expect a rate cut.
“They are getting closer” to reducing rates, said David
Duarte, a Latin America analyst at 4cast Inc. in New York. “As
the growth cycle continues to break down, and the deflationary
scenario picks up on the global scale, that helps to rein in
inflationary pressure.”
Since taking office in 2002, Colombian President Alvaro
Uribe focused his policies on rooting out drug-funded rebels and
paramilitaries, prompting a surge in consumer confidence and
bank lending, pushing Colombia’s economy to 8 percent growth
last year, the fastest pace in three decades.
The increased sense of personal security, investment and
consumer spending on big ticket items such as cars and new homes
also led to a near doubling of the annual inflation rate in less
than three years to 7.94 percent in October.
Now, as the first simultaneous recession since World War II
in the U.S., Europe and Japan looms over Colombia and consumer
confidence wanes, inflation at 7.73 percent in November remains
almost twice the bank’s target pace for this year.
Still, inflation expectations over the next 12 months fell
to 5.36 percent in the bank’s December survey of economists,
from 5.84 percent last month.
Cano said the board has done what it set out to do, slow
inflation and cut the “euphoria” that backed high consumer
spending.
“You have to take into consideration that in monetary
policy there is a delay of 18 to 24 months,” he said.
The annual pace in local bank lending has halved to 18
percent since its peak in March 2007, Cano said. Consumer
lending has dropped from annual growth rate of 50 percent to 14
percent.
After reaching a seven-year high in October, inflation did
decelerate last month, and Cano expects the bank will be able to
meet its 2009 year-end target for consumer prices.
“I have absolutely no doubt we will meet the target” of
4.5 percent to 5.5 percent, said Cano. “It’s time to start to
normalize policy and reduce rates to compensate and help prepare
the internal market against what’s to come. Next year will be a
year of much lower growth.”
At the past two board meetings, at least some board members
called for a cut in interest rates of as much as a half point as
the economy slows more than expected.
Cano, who declined to say how he voted at the meetings,
said growth will slow this year to about 3.5 percent and next
year to as low as 2 percent.
“Growth is very low compared to the potential,” said Cano
who believes sustainable growth without inflation should be as
much as 6 percent annually.
Gross domestic product expanded 3.7 percent in the second
quarter, the slowest pace since 2003, and down from 8.4 percent
in the same period a year ago.
As the global economic slowdown spreads, Cano said
Colombian banks are well consolidated, capitalized,
administered, have strong earnings and little exposure to
foreign debt. Still, industrial production, retail sales and
construction are all falling, he said.
The economic slowdown will effect Colombia’s exports to
Venezuela and Ecuador, which accounted for almost a fifth of the
country’s exports in 2007, as the price of commodities like oil
drop, said Cano.
The composition of the country’s exports is a concern as
many goods sold overseas are labor intensive, like processed
foods, textiles and shoes, said Cano, which may impact jobs.
The peso appreciated almost 80 percent between late January
2003 and mid-June, hurting exports, which account for almost a
fifth of Colombia’s $172 billion economy.
The peso rose 0.3 percent to 2,263.00 per dollar at 2:57
p.m. New York time, according to the Colombian foreign-exchange
electronic transactions system, known as SET-FX.
Unemployment has begun to rise, reaching 11 percent in
October, up from 10.2 percent a year ago. salaried, professional
jobs with social security are being lost, said Cano.
“In the past months, unemployment has started to climb,”
said Cano. “What worries me more is the composition of the job
losses: The jobs that are being destroyed are salaried jobs.” (Bloomberg)