Colombia’s central bank kept borrowing costs unchanged for a fourth straight month as growth cools and prices for it commodities exports drop.
The seven-member board, led by bank chief Jose Dario Uribe, voted to keep the overnight lending rate at a three-year high of 5.25 percent today, matching the forecast of all 33 economists surveyed by Bloomberg. Uribe said the vote wasn’t unanimous.
“They left the door open to future cuts, but it will mainly depend on the situation in Europe,” said Daniel Velandia, the head analyst at Correva brokerage in Bogota. “Whether the economy decelerates more or not will depend on the external environment.” That vote wasn’t unanimous wasn’t a surprise, as board member Carlos Gustavo Cano had spoken out earlier this month on the need for lower rates, Velandia said.
Banco de la Republica last year flouted a trend for lower rates as surging credit growth and record investment in its oil and mining industries helped spur the fastest economic growth since 2007. Since the start of 2011, the bank raised nine times to cool growth even as other emerging markets reduced rates in response to Europe’s worsening debt crisis.
Economic “growth in the first quarter was near the lower limit of the range forecast by the bank’s technical team,” policy makers said in their statement. While noting that commercial lending “continues to slow” as has the growth of household credit, board members underscored that the expansion of consumer credit “is still high.”
If household consumption remains weak, and gross domestic product is sluggish in the second quarter, the central bank will cut rates in September or October, Juan Camilo Santana, an analyst at Cia. de Profesionales de Bolsa, said.
Finance Minister Juan Carlos Echeverry, who forms part of the central bank’s policy committee, told reporters in Bogota this week that Colombia will cut rates this year “if needed,” and that this will depend on the international scenario. The last time the central bank lowered borrowing costs was in April 2010.
The central bank raised interest rates by 2.25 percentage points between February 2011 and February 2012. Colombia now has higher borrowing costs than Chile, Peru and Mexico, though lower than the 8.5 percent benchmark rate in Brazil.
Retail sales slumped 2.8 percent in April from a year earlier, a worse result than all 16 forecasts in a Bloomberg survey of economists, whose median estimate was for a 4.1 percent increase.
Industrial output also fell unexpectedly, while urban unemployment rose and building permits fell 29.7 percent from a year earlier. The statistics agency reported today that urban joblessness rose to 11.9 percent in May from 11.4 percent in April.
With some members of the central bank’s board still worried about the pace of credit growth it will be difficult for policy makers to reach an agreement that rate cuts are needed unless growth slows even more, said Francisco Rodriguez, a New York-based economist at Bank of America Merrill Lynch. Credit expanded 19.4 percent in April from a year earlier.
“We don’t see evidence that deceleration has reached the point that would lead the bank to say yes this is getting serious enough for us to cut,” Rodriguez said in a telephone interview before the rate decision.
Colombia’s economy grew 4.7 percent in the first quarter from a year earlier, its slowest pace since 2010, as the world’s biggest currency rally this year hurt farmers and manufacturers, while spending on public works slumped.
The peso has strengthened 8.7 percent to 1,783.76 per dollar this year, the biggest gain of 170 currencies tracked by Bloomberg. President Juan Manuel Santos told coffee growers in Medellin this week that he wants the central bank to take “more aggressive” action to weaken the peso.
The central bank wants a more devalued exchange rate, Uribe said today. Additionally, the daily purchases of at least $20 million will continue until Nov. 2, Uribe said, adding that the central bank has tools to supply liquidity to the foreign exchange market.
Santos said the country could increase its international foreign currency reserves by about $8 billion to $10 billion. Colombia had reserves of $34 billion in April.
Annual inflation slowed to 3.44 percent in May, the second-lowest rate after Chile of 13 Latin American economies tracked by Bloomberg, from 3.73 percent at the start of the year.
The central bank targets inflation of 3 percent, plus or minus one percentage point.
Oil exports rose 70 percent to $28 billion dollars last year, while exports of coal rose 40 percent to $8.4 billion. Oil accounted for 49 percent of the country’s sales abroad last year. The price of crude has slumped 14 percent this year.
The yield on Colombia’s benchmark 10 percent peso-denominated bond due in July 2024 rose one basis point to 7.01 percent, according to the central bank.