Colombia Rate Cut More Likely Than Rise, Central Banker Says

The Colombian central bank’s next move is more likely to be an interest-rate cut than a rise, board member Cesar Vallejo said. The peso pared gains and interest rate swaps fell.

“There’s more chance of a reduction than an increase,” Vallejo said in an interview in Bogota yesterday, citing turmoil in European markets and the weak global economy. “That doesn’t mean we’re going to cut rates at the next meeting.”

The peso reversed earlier gains, falling 0.1 percent to 1,787.90 per dollar at 11:29 a.m. in Bogota. The yield on three- month interest-rate swaps fell 3 basis points, or 0.03 percentage point, to 4.97 percent. The yield has fallen 28 basis points since March 3, indicating traders expect an interest rate cut within the next three months.

Colombia held its benchmark interest rate at 5.25 percent for a fourth straight meeting last month, and at least one member of the central bank’s seven-person policy committee voted for a cut. Vallejo said Colombia’s economy is growing close to its long-run potential, meaning that any change in borrowing costs would be a form of “fine-tuning.”

Central Bank Meeting

Central bank Governor Jose Dario Uribe said last week that policy makers will “very probably” cut their 2012 growth forecast from the current range of 4 percent to 6 percent, as a slowing global economy reduces demand for the Andean nation’s exports. Policy makers next meet to discuss the benchmark rate on July 27.

A recovery in public-works spending and “dynamic” internal demand sustained by consumer-credit growth and high levels of consumer confidence will prevent the economy from cooling too fast, the 69-year-old Vallejo said.

Colombia’s economy grew 4.7 percent in the first quarter from a year earlier, its slowest pace since 2010, as a rally in the peso hurt farmers and manufacturers, while spending on public works fell.

The peso has appreciated 8.4 percent this year against the dollar, the second-biggest gain among 170 currencies tracked by Bloomberg, behind the Zambian kwacha. Exports grew 1.2 percent in May from a year earlier, down from 4 percent in April and 16.1 percent in March.

“The whole board agrees that a weaker exchange rate would be desirable,” Vallejo said.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

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

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