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Colombia Cuts Rate to 4.25% to Lift Slowest Andean Growth

Dec. 21 (Bloomberg) -- Colombia’s central bank cut interest rates for a second consecutive meeting today, as policy makers try to revive the slowest economic growth in the Andean region.

Banco de la Republica, led by bank Governor Jose Dario Uribe, cut its benchmark interest rate by a quarter point to 4.25 percent, as forecast by 11 of 32 analysts surveyed by Bloomberg. Twenty-one analysts forecast no change in the rate. Uribe said the vote wasn’t unanimous.

“The Colombian economy is growing below its potential, and observed and projected inflation is falling below the 3 percent target with no looming upward pressure on it in the future,” policy makers said in their statement posted on the bank’s web site. Speaking after the decision in Bogota, Finance Minister Mauricio Cardenas said the economy’s potential growth rate is 4.3 percent to 4.8 percent

Policy makers have lowered borrowing costs at four of their last six board meetings, citing the weakening global economy, giving Colombia the lowest borrowing costs in the region alongside Peru. Today’s decision comes after the Andean nation’s growth rate fell to a three-year low in the third quarter, and inflation slowed below the mid-point of its target range for the first time since April 2011.

“We see inflation that is under control, that could end the year at 2.5 percent,” Juan David Ballen, an analyst at brokerage Alianza Valores SA, said in a phone interview from Bogota before the decision. “The bank has the space to keep cutting the rate to react to the possibility of an equally bad fourth quarter.”

Slowing Down

Ballen, who has the most accurate track record of calling Colombian central bank decisions in Bloomberg survey, changed his forecast to a cut from a hold after the national statistics agency yesterday reported a slump in growth in the third quarter. He expects one more quarter-point cut in January.

The economy grew 2.1 percent in the third quarter from a year earlier, compared with 4.9 percent in the previous three months. The result was weaker than all 28 forecasts in a Bloomberg survey, where the median estimate was 3.9 percent.

Uribe today said that domestic demand “decelerated significantly.” Growth trailed Peru, Chile and Mexico, while out-pacing Brazil’s, the only other major Latin economy that has cut borrowing costs over the past six months.

Cardenas today said that fourth quarter growth will be better than the third quarter result and that 2013 growth will be closer to potential.

The yield on the government’s 9.25 percent debt due in May 2014 fell 33 basis points, or 0.33 percentage point, to 4.57 percent this week, as traders increased bets on interest rate cuts.

Prices, Growth Potential

Consumer prices fell 0.14 percent in November, pushing annual inflation to 2.77 percent from 3.06 percent the month before. Colombia targets inflation of 3 percent, plus or minus one percentage point.

The central bank may trim its 2013 forecast after measures of so-called “core” inflation, which exclude volatile food and fuel prices, slowed last month, Uribe said in a Dec. 12 interview. Policy makers’ current forecast is for prices to rise 3 percent next year.

When inflation is close to the central bank’s target, rate policy depends to a large extent on whether the economy is growing faster or slower than its so-called potential rate, board member Cesar Vallejo said in a Dec. 18 telephone interview.

The bank estimates the economy can expand 4.2 percent to 5.3 percent a year without triggering faster inflation.

Analysts surveyed by the central bank forecast inflation of 2.64 percent this year, and 3.10 percent in 2013, according to the most recent monthly survey.

Consumer credit expanded 18.8 percent in October from a year earlier, compared with 21 percent in June. The central bank’s concern over excess consumer credit has “diminished significantly” as loan growth slowed this year, Uribe said Dec. 12.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; Oscar Medina in Bogota at omedinacruz@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.

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