Colombia to Keep Rate at Three-Year High, Survey Shows

Colombia’s central bank kept borrowing costs unchanged for a third month, citing the deepening European debt crisis, slower-than-expected April inflation and lower oil prices.

The seven-member board, led by bank chief Jose Dario Uribe, voted unanimously to keep the overnight lending rate at a three- year high of 5.25 percent today, matching the forecast of all 26 economists surveyed by Bloomberg.

“Recent events in Europe increase the risk of a heavy recession in that continent, with scarce space for fiscal and monetary policies to combat it, and a fragile financial system,” Uribe said in Bogota today. “The higher chance of this scenario coming to pass increased the uncertainty on the central forecasts for Colombian growth.”

Colombia has defied a global trend for lower rates as domestic demand and record foreign investment helped power the fastest economic growth since 2007. As policy makers cite the risks of consumer-loan growth, which reached 22 percent in March, economists are sticking with forecasts for higher interest rates later this year, while traders see no change after inflation slowed to within the target range.

Policy makers will probably hold rates until at least October, said Andres Langebaek, a senior economist at Banco Davivienda SA. (PFDAVVND)

“The outlook for inflation is very close to the 3 percent target and with growth decelerating we don’t see a need to raise rates,” Langebaek said, speaking by telephone from Bogota. “The situation in Europe is a big worry, and growth could fall short of what people now expect.”

Rate Increases

Banco de la Republica has increased the key rate nine times since February 2011, raising it from a record low 3 percent as inflation accelerated to as fast as 4.02 percent in October.

Annual inflation quickened to 3.43 percent in April, from 3.4 percent in March. Uribe said the April figure was less than expected, and that inflation risks are “moderate”. Colombia targets consumer price increases of 3 percent, plus or minus one percentage point.

Policy makers said they have the tools to provide liquidity in local and foreign currency in an atmosphere of international financial turbulence. The peso appreciated 0.3 percent to 1827.50 per U.S. dollar as of 12:45 p.m. local time.

Rates Outlook

Trading in six-month and one-year interest-rate swaps reflect bets that rates won’t change through the rest of the year. Six-month swaps were little changed at 5.12 percent on May 25 from a record-high 5.48 percent Feb. 22, two days before policy makers raised borrowing costs. One-year swaps rose one basis point, or 0.01 percentage point, to 5.2 percent on May 25.

By contrast, the median estimate of 26 economists surveyed by Citigroup Inc. points to a 25 basis-point increase to the key rate by year-end, according to a report published May 23. That’s in line with a May 11 central bank report showing most economists expect policy makers to raise the lending rate a quarter point to 5.5 percent in September.

The South American nation moved to slow the pace of consumer credit growth earlier this month by increasing reserve requirements for lenders that have seen a rise in delinquent loans. Forcing banks to set more money aside will help avoid “future problems,” Finance Minister Juan Carlos Echeverry said in a May 18 statement.

Policy makers will need to raise interest rates further this year to maintain inflation in check amid the surge in lending, according to Felipe Campos, the head analyst at Alianza Valores brokerage in Bogota.

Inflation Risks

“The internal dynamics, with consumer lending growing at a strong pace, risks stoking inflation,” Campos said in a telephone interview before the rate decision. He forecasts policy makers will raise the key rate in the second half of the year to 5.5 percent.

Consumer borrowing is increasing after the economy grew 5.9 percent last year, the most since gross domestic product jumped 6.9 percent in 2007. The economy will grow about 5 percent in 2012, Uribe said in the May 18 presentation. That compares with International Monetary Fund forecasts for expansion of 5.5 percent this year in Peru, 2.1 percent in the U.S. and 3 percent in Brazil.

Colombia’s industrial production fell 0.9 percent in March from a year earlier, the first annual decline since October 2009. Retail sales rose 5.1 percent in the same month, the 30th consecutive month of increases.

“It’s very difficult to think the central will keep on lifting rates,” said Munir Jalil, the chief economist at Citigroup’s Colombia unit, speaking by telephone before the interest rate decision. “At a moment when the economy is decelerating, there is no pressure” to raise borrowing costs, he said.

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net; Christine Jenkins in Bogota at cjenkins28@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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