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Colombia Cites Financial Risk Concern for Surprise Rate Cut

Colombia’s central bank cited a high perception of risk in local financial markets and a greater- than-expected slowdown in economic activity for its unexpected decision to cut interest rates last month.

“While inflation and inflation expectations remain close to their long-term target, indicators of industry, imports of capital goods and sales of consumer durables suggest that the economy is slowing more than expected,” the bank said in the minutes of its November policy meeting published on its website today. “Additionally, although reductions in interest rates seem to be transmitting adequately to the market, the risk perception of some local agents remains high.”

The central bank’s board voted 4-3 last month to cut the benchmark interest rate to its lowest level in a year, surprising 31 of 33 analysts surveyed by Bloomberg, after the nation’s biggest brokerage collapsed and industry contracted for a second month. Colombia has lowered interest rates three times since July, the only major economy in the Americas apart from Brazil that has reduced borrowing costs in the past six months.

It is “relatively clear” that mention of risk perceptions was a reference to the implosion of Interbolsa SA (INTBOL)’s brokerage last month, said Daniel Velandia, the head of research at Correval SA brokerage in Bogota.

“From the macroeconomic point of view, there wasn’t much reason to lower rates,” Velandia said in a telephone interview from Bogota.

Slowing Down

The quarter-point cut in the policy rate, to 4.5 percent, came after the central bank opened a so-called liquidity window for brokerages in an effort to avoid disruptions in financial markets following the brokerage’s collapse.

Annual inflation slowed to 2.77 percent in November, the lowest rate since 2010, on cheaper food and transport costs. The central bank targets inflation of 3 percent, plus or minus one percentage point.

Industrial output shrank 1.3 percent in September from a year earlier, its second consecutive year-on-year fall. Gross domestic product grew 4.9 percent in the second quarter from a year earlier, the third-fastest expansion among Latin America’s seven biggest economies after Peru and Chile.

The biggest risks to Colombian growth next year are a “significant” recession in Europe and the so-called fiscal cliff in the U.S., policy makers said.

The yield on the government’s 10 percent bonds due in July 2024 rose five basis points, or 0.5 percentage point, to 5.88 percent, at 11.30 a.m. in Bogota. The peso was virtually unchanged at 1798.6 per dollar.

Finance Minister Mauricio Cardenas said Nov. 7 that regulators would liquidate Interbolsa’s brokerage after it had failed to meet a loan payment a week earlier.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; Oscar Medina in Bogota at omedinacruz@bloomberg.net.

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

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