Colombia’s central bank unexpectedly cut its benchmark rate for the first time in three months in a bid to revive growth and stem the peso’s rally.
The seven-member board, led by bank chief Jose Dario Uribe, reduced the benchmark lending rate to 4 percent today, surprising all 27 economists surveyed by Bloomberg. The vote was unanimous and policy makers said they “expect stability in the interest rate in the near future.”
“The half-point reduction seeks to strengthen the economic recovery and reduce possible negative effects resulting from trade restrictions and the appreciation of the peso,” Uribe told reporters at the central bank in Bogota.
South America’s fourth-largest economy went into a recession for the first time since 1998 when gross domestic product fell 1.1 percent in the last three months of 2008, followed by contractions in the first two quarters of 2009. Uribe anticipates that eight rate cuts since December will bolster consumer demand, underpinning a second-half rebound in growth.
The peso has strengthened 25 percent in the last six months, the second-best performance against the dollar after South Africa’s rand among 26 emerging market currencies tracked by Bloomberg worldwide.
The central bank missed its inflation target for the past two years as consumer spending created the strongest growth in three decades during 2007. That helped push inflation to as high as 7.9 percent last year. Policy makers have always said controlling inflation is the bank’s priority.
“The decision seems to have been motivated to counterbalance the appreciation of the peso,” said Benito Berber, a macro strategist at RBS Securities Inc. in Stamford, Connecticut, in a report today. “It could limit the downwards trajectory of inflation expectations.”
Sixteen interest rate increases leading up to last December helped relieve inflationary pressure, bringing the annual rate down to 3.1 percent last month. That puts it in line to end the year below the bank’s 2009 target of 4.5 percent to 5.5 percent and near its so-called long-term target of 3 percent.
Low inflation expectations were also a key issue in today’s rate decision, said Alvise Marino, an emerging-markets analyst at IDEAglobal in New York.
A central bank survey of 36 economists forecast year-end inflation of 3.3 percent this year and 4.4 percent for 2010. The bank said today inflation would likely end the year at around 3.5 percent.
“There are strong green shoots in the global economy and this is also true in Colombia,” said Rafael de la Fuente, chief Latin America economist at BNP Paribas SA in New York.
Still, any growth in the economy may be tempered by a diplomatic spat with Venezuela, he said.
Venezuelan President Hugo Chavez in July said he would freeze relations with Colombia and find alternatives to imports after Colombian President Alvaro Uribe announced a plan to allow U.S. troops to use military bases for anti- drug operations.
“Colombian exporters are suffering from the double whammy of a particularly strong peso and of the abrupt interruption of trade relations with Venezuela,” said Marino.
Colombian cargo planes have already been barred from entering Venezuela and Chavez has sought to substitute Colombian food and car imports with purchases from Argentina. Venezuela is Colombia’s second-biggest export market, with the two trading about $7 billion last year.
Chavez yesterday said trade between the two nations will be reduced to “zero.”
“I suspect if we do get the type of trade war Venezuela’s hinting at, it would be hard for Colombia not to be hit on the export side,” said de la Fuente.
The government reported yesterday that second-quarter GDP contracted 0.5 percent, following revised declines of 0.4 percent and 1.1 percent in the two prior quarters. Economists expected a 0.6 percent decline, according to the median of 22 forecasts compiled by Bloomberg.
Bank chief Uribe forecasts zero growth this year and an expansion of 2 percent to 3 percent next year. The Finance Ministry forecasts 2009 growth at 0.5 percent to 1.5 percent.
Policy makers have said they would continue to monitor the Colombian currency. The peso strengthened 0.2 percent to close at 1924.45 per dollar.
The yield on Colombia’s 11 percent bonds due in July 2020 fell to 9.130 percent from 9.148 percent yesterday, according to the stock exchange. The yield has declined 1.57 percentage points from 10.70 percent since Dec. 30, 2008, according to Colombia’s stock exchange.