Colombia Holds Policy Rate at 3.25% as Growth Accelerates

Colombia held borrowing costs unchanged for a seventh straight month as signs of a recovery persuaded policy makers that the economy doesn’t need more stimulus.

Banco de la Republica, led by Governor Jose Dario Uribe, left its policy rate at 3.25 percent, the lowest in Latin America, as forecast by 31 of 32 analysts surveyed by Bloomberg. The other economist expected a quarter-point cut to the record low of 3 percent, where the rate was held between April 2010 and February 2011.

Colombia reduced its key rate seven times between July last year and March, the deepest cuts in the region, as the central bank took advantage of the slowest inflation (COCPIYOY) since the 1950s to provide extra stimulus. With growth accelerating back toward its full potential rate, policy makers will start to tighten monetary policy early next year, according to Daniel Velandia, head analyst at Credicorp Capital’s Colombia unit.

“The central bank will start to withdraw stimulus in the first quarter of 2014, with the economy accelerating in November and December on the back of increased consumer and public spending,” Velandia said in phone interview before the policy meeting. “Exports are picking up, and inflation is going to gradually accelerate to 3 percent.”

Colombia will raise the policy rate to 4 percent by next September, starting with a quarter point increase in March, according to a central bank monthly survey of economists published Oct. 11. Chile and Mexico both cut borrowing costs in the past two months, while Brazil has raised rates to rein in consumer prices.

Downside Risks

At the central bank’s August board meeting, some policy makers, including Finance Minister Mauricio Cardenas, argued for a rate cut, citing “downside risks” to growth, and the chance that the U.S. would tighten monetary policy.

Cardenas, who chairs the central bank’s policy committee, in September dropped his call for a cut after second-quarter growth exceeded expectations and the U.S. Federal Reserve said it would continue its asset purchase program at the same pace.

In an Oct. 14 interview, Cardenas said a low inflation rate means Colombia should maintain its current policy for “some time.”

The economy grew 4.2 percent in the second quarter from a year earlier, faster than forecast by all 31 analysts surveyed by Bloomberg . Retail sales increased 6.9 percent in August from a year earlier, the biggest gain since March 2012, while exports climbed 8.9 percent led by coal and oil.

Inflation stayed below the 3 percent midpoint of the target range for the 11th consecutive month in September, when it was unchanged at 2.27 percent. In February, the inflation rate dropped to 1.83 percent, its lowest level in six decades.

Even as household demand picks up, industrial production remains weak. Output fell 3.9 percent in August from the year earlier, more than forecast by all 21 analysts in a Bloomberg survey.

Manufacturers have been hurt by a 26 percent gain in the peso over the past five years, the biggest rally among major emerging market currencies tracked by Bloomberg after the South Korean won and the Chilean peso.

To contact the reporter on this story: Oscar Medina in Bogota at omedinacruz@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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