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Colombia Cites ECB Action in October Interest Rate Hold

Colombia’s central bank cited the bond-buying plans of the European Central Bank and the strong performance of the Andean nation’s construction sector in its decision to leave interest rates unchanged last month.

“The biggest risk to economic activity continues to be a strong recession in Europe,” the bank said in the minutes published on its website today. “It seems the probably of this has diminished due to the actions of the European authorities and the reactions of the markets in that continent.”

A majority of the central bank’s seven-member board voted last month to keep the benchmark interest rate at 4.75 percent for a second straight month, after lowering it at their July and August meetings to offset the impact on weaker global demand. Analysts expect the rate to remain at its current level through September 2013, according to the most frequent forecast in a central bank survey published Oct. 11.

The central bank sees that “the world economy is showing less to be worried about, while inflation remains at levels that are very stable, and very close to their target,” said Cesar Corredor an analyst at Banco de Bogota SA, the nation’s second-biggest bank.

Internal Demand ‘Dynamism’

Policy makers also revised their forecast for 2012 gross domestic product growth to 3.7 percent to 4.9 percent, from a previous forecast of 3 percent to 5 percent. In a speech in Bogota, Colombian central bank chief Jose Dario Uribe said the economy will probably grow around 4.3 percent this year. Uribe said the wide range of the forecast is partly due to uncertainty over the level of civil works spending.

“The growth rate in 2012 will be satisfactory, taking into account the international situation, and GDP is close to its potential level,” the bank said in the minutes. “The dynamism of internal demand, stimulated by, among other things, investment in construction and civil works, and by terms of trade, will continue to stimulate national income and employment.”

Policy makers also said that monetary policy needs to take into account the fast pace of home price increases and credit growth to “minimize risks of future imbalances in these variables.”

Interbolsa, Inflation

Brokerages’ use of a liquidity facility that the central bank set up this week has been “very low,” Uribe said. The bank eased rules on collateral that it accepts from brokerages in repurchase agreements, after a liquidity shortage triggered the collapse and liquidation of Interbolsa SA’s brokerage, the country’s largest.

“In a sense it’s showing that the other brokerages have liquidity, or seem to be indicating that they have liquidity,” Uribe told reporters in Bogota today.

Uribe said the liquidity window was an “extraordinary measure” to prevent contagion from Interbolsa’s collapse.

Annual inflation slowed to 3.06 percent in October, the lowest rate in Latin America after Chile among the region’s seven biggest economies, from 3.08 percent in September. The central bank targets inflation of 3 percent, plus or minus one percentage point.

Gross domestic product grew 4.9 percent in the second quarter from a year earlier, the third-fastest expansion among Latin America’s seven biggest economies after Peru and Chile.

The peso dropped 0.3 percent to 1,815.35 per U.S. dollar. The currency has gained jumped 6.8 percent this year, the biggest gain of Latin American currencies tracked by Bloomberg after the Chilean peso.

Yields on the 17-nation euro-area’s most indebted nations, including Spain and Italy, have fallen since the ECB unveiled its Outright Monetary Transactions bond-buying plan in September, pledging to spend as much as needed to restore confidence in government bond markets.

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