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Colombia Keeps Rate at Record Low 3% as Economy Grows Amid Tame Inflation

Colombia’s central bank kept its benchmark interest rate unchanged at a record low for a third month as policy makers bet that a rebound in economic growth is unlikely to spur excessive inflation.

The seven-member board maintained the interbank rate at 3 percent, matching the forecasts of all 27 economists surveyed by Bloomberg. Today’s meeting was the last that included Finance Minister Oscar Ivan Zuluaga, who stands down when President Alvaro Uribe’s term ends Aug. 7.

The bank also raised its economic growth forecast for the year by 1.5 percentage points to a range of 3.5 percent to 5.5 percent. Earlier this year, the government, which has separate forecasts, had predicted growth of as little as 2.5 percent. As output picks up, annual inflation remains tame, near the bottom of the central bank’s 2 percent to 4 percent target.

“With inflation at such low levels and little prospect of that changing, this was the easiest of decisions for the central bank,” said Rupert Stebbings, head of the Colombian unit of Chilean brokerage Celfin Capital SA. “Zuluaga’s last meeting as a member will have been one of the most predictable.”

Annual inflation quickened to 2.25 percent in June. It may end the year at 3.06 percent, down from 7.7 percent in 2008, according to the average estimate of 46 economists in a central bank survey published July 9. Prices rose 2 percent last year.

The Colombian peso has appreciated 9.4 percent this year, the best performance against the dollar among 26 emerging market currencies tracked by Bloomberg.

Faster Growth

“The information received in the last weeks indicate the Colombian economy is growing at a faster rhythm than expected without generating inflationary pressure,” central bank chief Jose Dario Uribe told reporters in Bogota after the decision.

He added that consumer confidence has improved in recent months, while exports have increased. Inflation will remain within the bank’s target range this year and next, he said.

“Inflation and economic growth are totally under control,” said Camila Estrada, head analyst at Helm Bank SA in Bogota. “There may be some increases in food prices because of the huge amounts of winter rain, but we will have to see how that plays out.”

Still, the International Monetary Fund predicts Colombia’s recovery from its first recession in a decade will lag behind its South American neighbors. The IMF forecasts growth of 2.25 percent this year, slower than all other major regional economies except Venezuela, which is in recession.

Inflation Outlook

“The recovery of activity does not present an immediate challenge to the inflation outlook,” Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a report. “The economy is still operating with some slack, wage pressures are moderate, and inflation expectations are well anchored.”

Today’s board meeting was the last before Juan Manuel Santos takes over as president from Alvaro Uribe, who spent eight years in office. Santos has charged incoming Finance Minister Juan Carlos Echeverry with stoking annual growth of 6 percent within two years and creating a fiscal stabilization fund once debt levels are reduced.

Colombia’s growth is lagging other South American nations in part because of a diplomatic dispute with Venezuela. President Hugo Chavez yesterday cut ties with Colombia after facing accusations he’s harboring as many as many 87 guerrilla camps that are used to smuggle cocaine and launch terrorist attacks across the border.

Rebel Camps

Colombia yesterday presented what it said was photographic evidence at a special meeting of the Organization of American States that leaders of the guerrilla group the Revolutionary Armed Forces of Colombia are living freely over the border in Venezuela.

“The demand driven inflation caused by Venezuela’s inability to feed itself is a thing of the past and with developments yesterday does not appear to be coming back anytime soon,” Stebbings said.

Exports from South America’s fourth-biggest economy to Venezuela declined 71 percent in the first five months of 2010 from the same period a year earlier. Before relations soured, Venezuela was Colombia’s biggest export market after the U.S.

Bank chief Uribe said today that Colombia’s businesses won’t see any additional impact from the spat with Venezuela.

To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net

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