Colombia Holds Rate at 3% After April’s Surprise Cut

Colombia’s central bank kept its benchmark interest rate unchanged after last month’s unexpected half-point cut aimed at bolstering the economy’s recovery.

The seven-member board, led by bank President Jose Dario Uribe, held the interbank rate at a record low 3 percent. All 31 economists surveyed by Bloomberg had predicted that the bank would keep rates unchanged today.

“There’s no reason to raise, there’s no reason to cut,” said Alberto Bernal, head of fixed-income research at Bulltick Capital Markets in Miami. “There’s absolutely no risk on the inflation front. The economy is picking up, but it’s not booming.”

South America’s fourth-biggest economy emerged from its first recession in a decade in the fourth quarter. In the months ahead, growth in Colombia may lag behind other economies in the region as a freeze on trade with Venezuela and weakening commodity prices sap demand for the country’s goods, said Capital Economics Ltd.’s Neil Shearing.

“The board considers that the adopted expansive monetary policy, including the recent half-point rate cut, contributes to growth in the economy in an environment characterized by a healthy financial system,” Uribe said after announcing the rate decision.

Colombian monetary policy is out of step with its faster-growing neighbors Brazil and Peru, which both raised rates in the past month to prevent their economies from overheating. Chile’s central bank is also planning a gradual series of rate rises, bank President Jose De Gregorio said May 17.

Venezuelan Trade

The recovery from the global economic downturn is slower in Colombia than in other South American nations, partly due to a diplomatic dispute with Venezuela, which caused a slump in exports to the country that had been Colombia’s second-largest trading partner after the U.S.

“It comes down to the loss of the market in Venezuela,” said David Duarte, a New York-based analyst with 4Cast. “The other countries didn’t suffer the loss of external demand as Colombia did. That is the defining difference.”

Exports to Venezuela fell 69 percent in March from the same month in 2009, according the national statistics agency. Trade with Venezuela collapsed following a dispute in July 2009 over the U.S. military presence in Colombia.

Colombia holds its presidential election this weekend, with former Defense Minister Juan Manuel Santos and Antanas Mockus, a one-time mayor of Bogota, leading the field. If neither gets 50 percent support, the race goes to a run-off on June 20.

European Crisis

The financial crisis in Europe could also damp Colombia’s rebound, Shearing said, as weaker world growth cuts demand for Colombian exports such as oil and coal, and as investors shun riskier assets in emerging markets.

Uribe said the economy is growing faster than expected without causing inflationary pressure. The European crisis had little effect on Colombia, he said.

“It will have an impact through commodities prices and less appetite for risk in financial markets,” Shearing said. “That suggests a less benign global backdrop for the Colombian economy and Colombian markets, and, given that, there is no rush to tighten.”

Colombia’s economy will grow 2.25 percent in 2010, the slowest in South America after Venezuela, which is still in recession, according to an International Monetary Fund forecast.

GDP Estimates, Inflation

Finance Minister Oscar Ivan Zuluaga said May 14 that the government’s forecast of 2.5 percent growth was probably an underestimate. The IMF expects Peru and Brazil to grow more than 6 percent.

Colombia’s central bank board cut rates last month -- surprising all 31 economists surveyed by Bloomberg -- after annual inflation fell to a five-decade low of 1.84 percent in March, below the bank’s target range of 2 percent to 4 percent.

Policy makers believe low inflation gives them space to provide additional stimulus to an economy that continues to suffer from high unemployment, according to the minutes of the April monetary meeting, published May 14.

Urban unemployment was 12.3 percent in March 2010, the highest among the eight biggest economies in Latin America

Consumer prices rose 1.98 percent in April from the same month a year earlier. Inflation will quicken to 3.5 percent by the end of 2010, according to the median estimate of 10 economists surveyed by Bloomberg.

Gaining Momentum

Since last month’s central bank meeting, new data from the national statistics agency appear to show the economy starting to gain momentum.

Retail sales rose 9.3 percent in March from a year earlier, while industrial output grew 4.5 percent over the same period. Both figures were higher than the median forecasts in surveys conducted by Bloomberg.

Policy makers will also take the peso’s exchange rate into account when setting the overnight rate for the next month.

The peso is the best performer among 26 emerging market currencies tracked by Bloomberg over the past 12 months, gaining 12 percent against the dollar. At 2:13 p.m. New York time, it traded at 1969.00 per dollar, a 0.2 percent gain.

“On pretty much any measure, the peso is overvalued,” Shearing said. “Foreign direct investment has been remarkably resilient over the past 12 to 18 months, and the peso is accordingly strong, which is a real headache for policy makers.”

Colombia received $7.2 billion in foreign direct investment in 2009 after a record $10.6 billion the previous year, according to the central bank.

The central bank March 3 said it would buy $20 million in daily auctions through the first half of the year to contain the “misaligned” exchange rate.

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