Colombia’s central bank will “very probably” cut its forecast for 2012 economic expansion as a slowing global economy cuts demand for the Andean nation’s exports, bank chief Jose Dario Uribe said.
Banco de la Republica currently forecast gross domestic product growth of 4 percent to 6 percent this year. Uribe declined to say what the new forecast will be.
“The data for the behavior of exports and of the industrial sector will very probably lead the central bank’s forecasters to lower the estimate,” Uribe said in a July 6 interview in Cartagena. “This is happening everywhere. In emerging markets, there is an impact on exports which particularly affects the manufacturing sector.”
Colombia held its benchmark interest rate unchanged at 5.25 percent for a fourth straight meeting last month, and at least one member of the central bank’s seven-man policy committee voted for a cut. Traders are betting that the bank will reduce borrowing costs within the next three months, trading in interest-rate swaps shows.
Annual inflation slowed to 3.20 percent in June, a lower number than predicted by all 20 analysts surveyed by Bloomberg, whose median forecast was 3.32 percent. Uribe said inflation will continue to slow this year, and will end 2012 close to the mid-point of the central bank’s 2 percent to 4 percent target range.
Uribe said the Nino weather phenomenon is unlikely to have an effect on inflation this year.
The yield on three-month interest-rate swaps fell 24 basis points, or 0.24 percentage point, since March 23 to 5.01 percent. The drop indicates traders expect an interest rate cut within the next three months.
Colombia’s economy grew 4.7 percent in the first quarter from a year earlier, its slowest pace since 2010, as a currency rally hurt farmers and manufacturers, while spending on public works slumped. Exports grew 4 percent in April from a year earlier, down from 16.1 percent in March, while industrial output had its biggest year-on-year contraction since 2009.
The peso has strengthened 8.6 percent to 1785 per dollar this year, the biggest appreciation of 170 currencies tracked by Bloomberg, even as the central bank has intervened in the foreign exchange market to try to slow its rise.
“We would like a more devalued peso,” Uribe said. “For us to intervene, we have the criteria that there must be a possible misalignment in the exchange rate, and when the economy grows it’s appropriate to have more international reserves.”
The central bank could increase dollar purchases from the current daily minimum of $20 million, or extend the program of dollar purchases beyond the current planned end date in November, Uribe said.
The daily dollar purchases, which the central bank announced in the first week of February, may have prevented the peso from strengthening even further, Uribe said.
“The currency has remained for almost the whole period at a level weaker than it was when we started to buy the daily $20 million,” he said. “And it had a strong tendency to appreciate, so you can’t say it hasn’t been effective.”
Policy makers believe the measures taken by President Dilma Rousseff’s government in Brazil, such as taxes on foreign loans, which contributed to an 8 percent weakening in the real this year, wouldn’t be effective in Colombia, Uribe said.
Colombia raised its benchmark interest rate 9 times in the year through February, bucking a global trend for lower borrowing costs. Uribe said the rate increases were to fend off “the possibility of an overheated economy financed by excessive consumer credit.” Credit growth has since slowed “a bit,” partly due to the rate increases, Uribe said.
Uribe said Colombia’s traditional “very prudent” anti-inflation stance may be traceable to a bout of hyperinflation more than a century ago, triggered by a civil war that began in 1899. The out-of-control price increases that followed the War of a Thousand Days may have caused a lasting change on Colombian economic policy similar to the effect that hyperinflation during the Weimar Republic had on Germany’s, Uribe said.
In the late 20th century, “Colombia didn’t have the high levels of inflation that the rest of Latin America had, partly for this reason,” Uribe said. “This is same argument that people make for Germany after World War I, that they had hyperinflation, and after that they had discipline. You can make the same argument for Colombia 20 years earlier.”