Colombia Bank Cuts Rate to Record 5% as Growth Slows
Colombia’s central bank cut its benchmark interest rate to a record today and signaled it’s ready to lower it further in an effort to ward off an extended recession as inflation eases.
Policy makers, led by central bank chief Jose Dario Uribe, reduced the interbank rate by 1 percentage point to 5 percent, matching the expectations of 20 of 29 economists surveyed by Bloomberg. The other analysts forecast smaller cuts of 0.5 point to 0.75 point.
Any future rate reductions will be smaller in size than today’s cut, the bank said. Policy makers are trying to spur consumer demand after the economy contracted in the fourth quarter of 2008, the first drop since 1999.
“With the inflation available at this moment, the board expects any future eventual reductions of the interest rate will be less than those recently observed,” the bank said in a statement.
Gross domestic product probably shrank again in the first three months of 2009, helping slow annual inflation and allowing the central bank to continue its rate-cutting cycle, Uribe has said.
‘Clearly Expansive’
The lending rate is “clearly expansive,” and growth will pick up in the second half of the year, the bank’s statement said.
“Growth remains very troublesome, and inflation expectations and actual inflation are performing much better than expected,” Alberto Bernal, head of emerging markets research at Bulltick Securities Corp, said before the decision.
Policy makers this year have said the economy is weakening faster than they anticipated. Still, Uribe has cautioned against keeping rates low for too long, saying that by encouraging borrowing they run the risk of fueling inflation. The board targets inflation this year of 4.5 percent to 5.5 percent. Inflation has exceeded the bank’s annual target two years in a row.
Colombia’s consumer prices rose 0.32 percent in April from the previous month and the annual inflation rate fell to 5 no fax payday loans.73 percent from 6.14 percent in March. Inflation ended 2008 at 7.7 percent, the highest year-end rate since 2000.
Inflation Risk
“If the economy improves strongly in the last quarter, low interest rates for too long would be inflationary,” said Jaime Rodriguez at Bogota-based brokerage Asesores en Valores.
At 5 percent, the rate is the lowest since 1998 when the bank began targeting inflation principally through its overnight lending rate.
Surging consumer demand in Colombia since President Alvaro Uribe took office in 2002, pledging to make the nation safe from drug-funded violence, helped drive the economy in 2007 to 7.5 percent growth, its fastest expansion in three decades.
That pace slowed to 2.5 percent last year as the central bank’s 16 interest rate increases in 28 months and the global economic slump choked bank lending and sapped consumer confidence.
“Internal demand continues to show extraordinary weakness, and that highlights that risk remains on the downside,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York.
Colombian retail sales have fallen for seven straight months through March, while industrial production declined for seven months through February.
‘Expansionist’ Policy
Finance Minister Oscar Ivan Zuluaga on May 21 said there is still room to cut rates as part of the bank’s “expansionist monetary policy” to bolster economic growth. The government expects the economy to grow 0.5 percent to 1.5 percent in 2009, while the central bank sees growth at slightly above zero.
“The situation is getting better,” Rodriguez said. “We should see improvements in the housing market, which is picking up again, and in the export sector.”
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