Colombia Holds Rate at 3% as Inflation Eases, Economic Growth Accelerates

Colombia’s central bank kept its benchmark interest rate unchanged at a record low for a fourth month and said it will buy dollars in the spot market to ease gains in the peso when “appropriate.”

The seven-member board maintained the interbank rate at 3 percent, matching the forecasts of 21 of 23 economists surveyed by Bloomberg. Two economists expected a cut to 2.5 percent. Today’s meeting was the first to include Finance Minister Juan Carlos Echeverry, who took office with President Juan Manuel Santos on Aug. 7.

“The central bank surprised by not announcing any concrete measures,” said Jimena Zuniga, a Latin America economist at Barclays in New York. “The bank did discuss the appreciation trend of the currency in its statement. However, in contrast with instances of intervention in the past, the bank did not refer to the appreciation as unsustainable or as symptomatic of currency misalignment.”

The president last week said he would seek to persuade policy makers to be “more creative, more bold” in stemming gains in the currency, which has strengthened 12 percent this year, making the country’s exports more expensive in dollar terms.

‘Always Prepared’

Santos’ comments echo those of his predecessor, Alvaro Uribe, who worried investors by repeatedly asking the independent central bank to take measures to weaken the country’s currency and help factories preserve jobs. A stronger peso makes Colombian exports more expensive in dollar terms.

Central bank chief Jose Dario Uribe, speaking after the decision, said that while Banco de la Republica “is always prepared” to intervene in the currency market, he wouldn’t say it is “imminent.”

The peso dropped 0.1 percent to 1820 per dollar at 4:30 p.m. New York time, paring its 2010 gain to 12.3 percent, the best performance among world currencies tracked by Bloomberg. Colombian markets closed before the central bank’s announcements.

With growth in the $231 billion economy accelerating and annual inflation near the bottom of the central bank’s 2 percent to 4 percent target range, the board can turn its attention to the peso, the best performing currency tracked by Bloomberg this year.

Sterilization

“Actual inflation and expectations remain benign, even as growth is beginning to recover faster than originally anticipated,” Bank of America Corp. said in a report today. “However, the bank should be concerned with real rates turning negative, so we expect the first hike in the fourth quarter.”

Annual inflation was 2.24 percent in July as consumer prices fell 0.04 percent from the previous month.

The central bank purchased $20 million a day between March 3 and June 30, or $1.6 billion in total, to curb a rally policy makers said left the peso “misaligned.”

The central bank has 1.6 trillion pesos ($879 million) of government bond holdings which it can sell to take pesos out of the economy, Uribe said. Other sterilization instruments that were discussed include the possibility of the government depositing funds in the central bank and for Banco de la Republica to issue its own debt, he said.

“The board analyzed the currency situation, and especially the use of sterilization instruments in addition to those used in the past,” central bank chief Uribe said today. “In that way should the bank intervene in the future, it will have more capacity to do so without compromising the inflation target.”

Growth Goals

The central bank has the possibility of mandating deposits on loans taken abroad and may impose that measure should it deem it “appropriate,” said Uribe.

“The government will adopt measures that will incentivize imports and in that way increase demand for foreign currency as well as reducing costs for the productive sector to improve productivity,” Uribe said.

The bank will likely expand to $50 million a day dollar purchases that expired in June, Alberto Boquin, a Latin America debt and currency strategist at Bank of America, said before the announcement.

The Colombian Agriculture Society said in a statement last week that the peso’s rally is causing “ruin in the countryside.” The Flower Growers Association, whose annual exports of $1 billion are down about 10 percent this year, has asked the bank step up interventions to save hundreds of jobs.

Echeverry is seeking annual growth of more 6 percent within two years. He plans to boost spending on infrastructure, housing and agriculture, while creating as many as 2.4 million jobs. Colombia’s unemployment rate, at 12.8 percent, is the highest in Latin America.

Venezuela

The central bank has said the economy is growing faster than expected even though trade with Venezuela stalled last year when the neighboring country cut ties.

Venezuela’s President Hugo Chavez broke relations with then President Uribe after Colombia signed a deal with the U.S. that would allow its military personnel and equipment greater access to seven bases inside Colombia.

Colombia’s Constitutional Court blocked that agreement Aug. 17 on the grounds that the government must first seek congressional approval.

Exports to Venezuela plunged 72 percent to $760 million in the first six months of 2010 from $2.69 billion in the same period of 2008.

Investors have bought the currency as the government and central bank raised growth forecasts to 4.5 percent this year.

Still, the International Monetary Fund predicts Colombia’s recovery from its first recession in a decade will lag behind most of 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.

Colombia will attract about $10 billion in foreign direct investment this year, the government has said, boosting the value of the peso.

To contact the reporters on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net; Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

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