Colombia’s central bank may keep borrowing costs unchanged as concerns about the fastest inflation since 2001 are offset by slowing economic growth.
Policy makers will hold the interbank rate at a seven-year
high of 10 percent for the third month, according to all 26
economists surveyed by Bloomberg. The Bogota-based bank’s seven-
member board is slated to announce its decision this afternoon.
Bank chief Jose Dario Uribe’s 16 interest rate increases in
the past 2 1/2 years are curbing demand for goods such as cars
and real estate. Policy makers don’t want to risk further
slowing the economy by increasing borrowing costs more, said
Alvaro Camaro, an analyst at Stanford Financial Group’s unit in
“The economy is slowing very, very fast — industry is
looking weak, construction, retail: It’s all poor,” said
Camaro, who expects a rate cut by yearend. The bank is also less
likely to raise rates as it considers the impact of a global
credit crisis on growth and inflation, he added.
Economic expansion slowed to 4.1 percent in the first
quarter from 9.1 percent in the same period a year earlier.
Economists surveyed by Bloomberg forecast expansion of 4.4
percent in the second quarter, almost half the rate of a year
ago. Second-quarter growth will be announced Sept. 22.
President Alvaro Uribe has said the bank is putting the
economy and jobs at risk by leaving interest rates at the
highest level since August 2001. The economy probably won’t meet
the government’s 5 percent growth target this year, and gross
domestic product growth may slow to below 4 percent unless the
central bank cuts rates to stimulate spending, Uribe said.
The central bank counters it needs to anchor inflation
expectations. The bank’s board said there’s a delay between the
time monetary policy is changed and its impact on inflation.
At its last meeting Aug. 15, the board said consumer prices
will remain high for the coming months and then decline
“gradually” if inflation expectations continue to improve.
Annual inflation quickened to 7.9 percent in August, the
fastest since October 2001. Meanwhile, monthly price increases
slowed to 0.19 percent from 0.48 percent as food prices
declined. The bank has acknowledged it is unlikely to meet its
target inflation range of 3.5 percent to 4.5 percent this year.
Colombia posted its fastest growth in three decades last
year, stoking inflation, as the economy benefits from a decline
in guerrilla and paramilitary violence that has made roads safer
and given consumers the confidence to increase borrowing.
“Inflation is too high, but it’s beginning to come down;
the tightening cycle has been effective,” said Liliana Rojas,
an economist at Bogota-based Vision de Valores SA, who expects
the rate to be maintained. “The rate increases have been very
costly to the economy, which has decelerated significantly.”
Effect on Peso
Policy makers may also be less likely to raise rates as
they wait to see the effects of the bankruptcy of Lehman
Brothers Holdings Inc., the U.S. government’s takeover of
American International Group Inc. and other turmoil in
international financial markets.
The central bank’s board, led by bank chief Uribe and
Finance Minister Oscar Ivan Zuluaga, has been at odds over the
need to raise rates. Zuluaga, appointed by President Uribe,
argues that the spread between U.S. and Colombian interest rates
has strengthened the currency too much.
Zuluaga and President Uribe say the 3.6 percent increase in
the peso since the bank started to drive up interest rates in
April 2006 has curbed demand for Colombian exports and forced
companies to fire workers.
Colombia’s national jobless rate rose to 12.1 percent in
July while urban unemployment increased to 11.9 percent.(Bloomberg)