Colombia’s central bank will
likely cut interest rates again this year if inflation keeps
running below target and if the peso currency threatens to
hobble the export sector by staying strong against the dollar.
The bank left its key rate unchanged at 4.5 percent on
Friday, ending seven straight months of monetary policy
loosening. But pressure is growing for another rate cut as the
peso explores 10-month highs against the U.S. dollar.
Exporters and their allies in the government are arguing
for another rate reduction, considering that inflation is under
control and the wilting dollar is hurting profits for companies
that sell their products overseas.
“The political pressure is there but that will not make the
difference. The central bank has been genuinely surprised by
how low inflation has been and how much the peso has
strengthened,” said Camilo Perez, chief economist at Banco de
“We will probably see one or maybe two rate cuts of 25
basis points before the end of the year,” Perez said.
There are 100 basis points in a percentage point.
With U.S. interest rates pushed to historic lows, dollars
are flowing into countries with higher rates in search of
better returns. This pushes up the value of local currencies.
Another rate cut would make Colombia less attractive to
foreign investors and perhaps control the peso’s rise.
Central bank chief Jose Dario Uribe surprised investors on
Friday when he said policymakers were focusing on the peso, the
first time the bank had acknowledged it was worried about the
foreign exchange market rather than just inflation.
“The board is aware of the risks associated with currency
appreciation in a context of weak external demand and will
continue to monitor the foreign exchange market carefully,”
Analysts said the statement raised possibilities of an
increase in central bank intervention in the peso market.
Export-driven companies, which pay their costs in pesos but
receive dollars for their overseas sales, say they are being
forced to lay off workers due to the strong local currency.
The peso is up about 10 percent against the U.S. dollar
over the last month to 1,970 per greenback.
Juan Carlos Echeverry, Bogota-based analyst for the Latin
Source consultancy, said the bank “might cut rates by 50 basis
points if inflation remains low, and unemployment high,
especially now that exchange rate is appreciating.”
Also on Friday the central bank said that Colombian
inflation is likely to end 2009 under its target range of 4.5
to 5.5 percent.
Consumer prices fell 0.06 percent in June compared with a
0.86 percent rise in the same month last year, as household
demand was pressured by Colombia’s weak economy.
In the 12 months through June, inflation was a
lower-than-expected 3.81 percent.
Hurt by fallout from the world financial crisis, Colombia’s
economy shrank in the fourth quarter of last year and in the
first three months of 2009, containing local consumer prices.
The government expects a recovery in gross domestic product
to begin in the second half of this year, setting the stage for
projected growth of about 0.5 percent for 2009 and 2.5 percent
in 2010. (Reuters)