Cardenas Faces Defeat as Colombia Probably Will Spurn Rate Cut

Colombian Central Bank Will Probably Keep Rate at 4.75%
Colombian Finance Minister Mauricio Cardenas was sworn in as Finance Minister this month, inheriting an economy that grew 4.9 percent in the second quarter from a year earlier, beating the forecasts of all 29 analysts surveyed by Bloomberg. Photographer: Paul Smith/Bloomberg

Colombian Finance Minister Mauricio Cardenas will probably be outvoted at his first central bank meeting as an unexpected surge in growth prompts policy makers to ignore his calls for a third straight interest rate cut.

Banco de la Republica will hold its benchmark interest rate at 4.75 percent today, according to 22 of 33 analysts surveyed by Bloomberg. Eleven analysts expect a quarter-point reduction. The central bank lowered borrowing costs at its July and August meetings, citing a weakening global economy that has curbed demand for Colombia’s exports.

The U.S. Federal Reserve’s latest round of stimulus means Colombia must cut interest rates to prevent further gains by the peso that would harm the Andean nation’s manufacturers, Cardenas said this week. Cardenas, who was sworn in as finance minister this month, inherited an economy that grew 4.9 percent in the second quarter from a year earlier, beating the forecasts of all 29 analysts surveyed by Bloomberg.

“What need is there for more stimulus for an economy growing close to 5 percent?” said Julian Marquez, an analyst at Interbolsa SA brokerage in Bogota, in a telephone interview. “It’s better to have the ammunition stored for when there’s a big shock, rather than to have fired it when it wasn’t necessary.”

In Colombia, the finance minister sits on the central bank’s seven-member policy committee. Cardenas’ predecessor, Juan Carlos Echeverry, said Aug. 22 that he was “generally not on the winning side” at central bank meetings.

Faster Growth

Colombia grew faster than Brazil and Mexico in the second quarter, while lagging Chile and Peru. At the same time, Colombia has the lowest inflation rate in Latin America after Chile among the region’s nine biggest economies.

The pace of the economy’s expansion surprised some central bank board members. In the first two weeks of September, co-directors Juan Pablo Zarate and Carlos Gustavo Cano both forecast second-quarter growth of 4.2 percent.

Cardenas’ colleagues on the bank’s board will also probably view the third round of quantitative easing announced by the Fed this month as supportive of global growth and the case for keeping borrowing costs unchanged, Marquez said.

“QE3 should generate an improvement in world growth, so then an improvement in demand and in commodities prices,” Marquez said. “And this means the Colombian economy grows more.”

Marquez predicts policy makers will leave interest rates unchanged until at least year-end.

Inflation, Timing

In September, annual inflation will fall below 3 percent for the first time in 17 months, according to a Bloomberg survey of 12 analysts, whose median estimate forecasts a 2.97 percent increase.

Central bank chief Jose Dario Uribe said Aug. 27 that the bank began cutting interest rates due to “the behavior of internal demand, and especially due to the behavior of the global economy and its effects on exports and sectors such as industry.”

Uribe last month told lawmakers that inflation may end 2012 “slightly below” the mid-point of its target range. Colombia targets annual consumer price rises of 3 percent, plus or minus one percentage point.

The central bank has room to lower borrowing costs one more time this year, and will time the cut for when the peso is particularly strong, said Benito Berber, a Latin America strategist at Nomura Holdings Inc.

“The key factor to determine the timing of the cut, I think, is going to be the exchange rate,” Berber said. “If the peso were stronger, the probabilities of a cut would increase substantially.”

Currency, Yield Gap

The Colombian currency has appreciated 7.8 percent this year, the fifth-best performance against the dollar among the 31-most traded currencies tracked by Bloomberg worldwide.

The Treasury began a program of dollar purchases in August parallel to the central bank’s in an effort to curb the rally, and continued to do so even after Banco de la Republica stepped up its own intervention last month.

At its August meeting, the central bank committed to increase its daily dollar purchases to an average of $28 million per day through the end of September, from a minimum of $20 million per day previously. From Oct. 1, the bank’s purchases will then revert to the $20 million per day minimum until at least Nov. 2.

Policy makers today may announce an extension of the program until the year-end to “give the market security” that the central bank will remain active in the foreign exchange market, Marquez said.

In a Sept. 20 interview, Cardenas said there are “good reasons” for the central bank to continue to cut interest rates to offset the global slowdown, and that rate cuts would help curb the peso’s appreciation.

On Sept. 24, in an interview broadcast on the website of La Republica newspaper, Cardenas said Colombia “cannot remain neutral” in the face of QE3.

“This means that if there are very low rates in the U.S., we also need very low rates here so that there isn’t a very large differential between the yields on Colombian debt and U.S. debt, so it doesn’t become a factor that attracts capital,” the minister said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE