Colombia’s central bank unexpectedly reduced its main interest rate Friday for the first time since 2010 amid signs the economy is at risk of a sharp downturn due to declining global prices for oil, the country’s top export.
“Global economic growth continues to weaken more than expected,” Central Bank President Jose Dario Uribe told reporters after announcing the rate decision.
“The weakness of the global economy is restricting Colombian economic growth by way of reduced external demand and lower international prices for our main export products,” he added.
The bank’s seven-member board voted to reduce rates by 25 basis points to 5.0%. Of seven economists surveyed by Dow Jones Newswires, only two expected the bank to cut rates. The other five felt the bank would keep rates steady for a fifth straight month at 5.25%.
While the decision to reduce the rate was unanimous, some members had argued for a larger rate cut to give the economy a stronger boost.
Colombia’s economy grew 4.7% in the first quarter, year-on-year, but that’s a slowdown from 2011’s growth rate of 5.9%. Additionally, the most recent data on industrial production, retail sales, and consumer confidence suggests the economy is in for even slower growth rates during the rest of 2012.
The decline in the first quarter forced the central bank to adjust its 2012 economic growth projection to 3% to 5% for 2012 from its previous target of 4% to 6%. For 2013 the central bank said it expects economic growth to be similar to 2012.
Mr. Uribe also argued that lower inflation has given the bank the room to cut interest rates even while economic activity remains somewhat strong. Annual consumer inflation through June stands at 3.2%, comfortably inside the bank’s 2% to 4% target range. And economists expect the full-year 2012 inflation rate to be 3.1%, so inflation expectations are firmly under control.
The bank didn’t announce any new measures to help control excessive strength in Colombia’s peso against the dollar. Exporters who have been hurt by the peso’s 8% gains against the dollar this year have been clamoring for the bank to increase its daily dollar purchases aimed at offsetting the peso’s tendency to rise against the U.S. currency.
The bank currently buys at least $20 million a day in the spot market, and exporters would have liked to see the bank bump that up to $30 million or $40 million.
Finance Minister Juan Carlos Echeverry, who is a member of the central bank’s board, said that some members in the board were in favor of increasing the daily dollar purchases.