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Colombia May Pause at 3% After April’s Surprise Cut

Colombia’s central bank will probably keep its benchmark interest rate unchanged today 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, will keep the interbank rate at a record low 3 percent, according to all 31 economists surveyed by Bloomberg. The bank’s decision last month, coming two days after Brazil raised rates by a more than expected 75 basis points and after policy makers in Chile considered a pre-emptive increase, surprised all 31 economists surveyed by Bloomberg.

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.

“If there’s any movement in the next six months, it will certainly be a cut,” said Shearing, an emerging-markets economist at the London-based research company, who expects interest rates to remain on hold until mid-2011.

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.


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 compared with 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 polls 50 percent, 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.

“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. 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 over 6 percent.

Inflation Outlook

Colombia’s central bank board decided to cut rates last month 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 rise 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 over the past 12 months, gaining 12.6 percent against the dollar. In trading today, the peso rose 0.3 percent to 1967.95 per dollar at 11:44 a.m. New York time.

Yields on Colombia’s benchmark 11 percent bonds due July 2020 fell 3 basis points, or 0.03 percentage point, to 7.98 percent. That’s the lowest level on a closing basis since May 3, the first full trading day after the bank’s April 30 surprise rate cut.

“On pretty much any measure, the peso is overvalued,” said Shearing. “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, because that squeezes the competitiveness of non-commodity producers.”

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 on 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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