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Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010

Colombia’s central bank will decide whether to keep borrowing costs unchanged for a fifth month today or join an international trend and begin cutting rates as slowing global growth curbs demand for the country’s oil, coal and farm exports.

Last month, at least two of the central bank’s seven board members voted to cut interest rates for the first time since 2010. Since then, the annual inflation rate has fallen to a one-year low, while central bank chief Jose Dario Uribe said the weakness of industry and exports had surprised policy makers.

Banco de la Republica last year bucked a global trend for lower interest rates as it moved to prevent the economy from overheating because of “excessive” consumer credit growth. Twenty-four analysts surveyed by Bloomberg forecast that the central bank will ignore calls from President Juan Manuel Santos for cheaper money and hold its policy rate at 5.25 percent, while 11 analysts forecast a quarter-point rate cut.

“The economy is decelerating, and given the international scenario, this is going to continue for the rest of 2012,” Andres Langebaek, senior economist at Banco Davivienda SA, said in a telephone interview from Bogota. “There’s no price pressure that needs to be controlled at the moment.”

Langebaek, the economist with the best track record of predicting Colombian rate decisions in Bloomberg surveys over the past two years, forecasts a quarter-point rate cut today.

The European Central Bank, People’s Bank of China and South Africa’s central bank have all cut borrowing costs this month, while policy makers in Brazil on July 11 reduced their key rate for an eighth straight meeting to a record 8 percent.

Output, Oil

Industrial output fell for a third straight month in May from a year earlier, while year-on-year export growth slowed to 1.2 percent, from 4 percent in April and 16.1 percent in March.

In addition to slowing overseas demand, Colombian exporters have also had to contend with the world’s biggest currency rally. The peso has strengthened 8.1 percent this year, the most of 170 currencies tracked by Bloomberg.

“The fall in industry shows that we are in a worldwide slowdown and that we also have a competitive problem with the exchange rate in the medium to long term,” Langebaek said.

Oil exports rose 70 percent to $28 billion dollars last year, while exports of coal gained 40 percent to $8.4 billion. Oil accounted for 49 percent of the country’s sales abroad in 2011. The price of crude has slumped 9.7 percent this year.

The emergence of oil as a major export and significant source of government revenue leaves the Andean nation vulnerable to swings in global crude prices and national production projections, Francisco Rodriguez, an economist at Bank of America Merrill Lynch in New York, wrote in a research note e-mailed to investors yesterday.

Credit, Presidents

Credit expanded 18.3 percent in May from a year earlier, down from year-on-year growth of 22.4 percent in December.

The yield on Colombia’s benchmark 10 percent peso-denominated bond due in July 2024 fell two basis points to 6.75 percent yesterday, according to the central bank.

Santos last week urged policy makers to consider lower borrowing costs and to step up daily dollar purchases.

“I have asked the central bank to study a cut in interest rates, and evaluate a more aggressive purchase of dollars to increase our international reserves,” Santos said in a July 20 speech to mark Colombian Independence Day. “This will also help us confront the phenomenon of revaluation.”

Colombia’s central bank has often ignored advice from Santos and his predecessor, Alvaro Uribe. In June, policy makers kept their daily dollar purchases unchanged at $20 million, even after Santos urged them to increase the amount.

In January, the central bank raised its benchmark interest rate a quarter point, after Santos said such a move wouldn’t be “appropriate.”

‘Remaining Concerns’

Annual inflation slowed to 3.20 percent in June, the lowest rate after Chile of 10 Latin American economies tracked by Bloomberg, from 3.73 percent at the start of the year.

Colombia targets inflation of 3 percent, plus or minus one percentage point.

Even as consumer-price increases ease, the central bank will likely wait until August to lower lending rates, said Camilo Perez, the head analyst at Banco de Bogota, the nation’s second-biggest bank.

The central bank board “is fairly conservative, and they are not sufficiently convinced yet that the information available shows that the best path is a rate cut,” Perez said in a telephone interview. “They will wait, for example, for a moderation in credit growth, which is one of their last remaining concerns.”

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