Colombian Central Banker Sees Rates on Hold Through 1Q 2014

Colombia should hold its policy rate at its current “expansionary” level of 3.25 percent for the next six to nine months to ensure that economic growth returns to its full potential, central bank co-director Carlos Gustavo Cano said.

The economy is growing less than full capacity, with low inflation expectations, industry contracting and an “uncertain” outlook for the world economy, Cano said in a interview by phone today. All of that points to a need to keep interest rates at a level that stimulates growth, he said.

“My personal forward guidance is that, given this scenario, I’d think that the benchmark rate could remain at least for the rest of the year at this same level, and probably during the first quarter of next year as well, to guarantee that the output gap really closes and also to guarantee that the observed inflation rate converges to its 3 percent target,” Cano said.

Colombia cut its policy rate by two percentage points between July 2012 and March 2013 as industry slumped and the inflation rate fell to a six-decade low. Analysts in a July central bank survey of economists forecast that policy makers will raise borrowing costs by half a percentage point in the first quarter of next year.

“My personal preference is not to cut further but to give the market a signal that we are going to remain stable during the next six or nine months,” Cano said.

Peso Strength

Industrial output fell 3.1 percent in May from a year earlier, the sixth contraction in the past seven months. President Juan Manuel Santos and Finance Minister Mauricio Cardenas have repeatedly said that a strong peso has hurt manufacturers and farmers.

The peso has weakened 7 percent this year, less than any other major South American currency. Even after this drop, it remains 6.5 percent to 7 percent stronger than its equilibrium rate, Cano said.

The currency strengthened 0.3 percent to 1899.72 per dollar at 12:22 p.m. today in Bogota.

At its May policy meeting the central bank extended its program of daily dollar purchases until September, saying it would buy at least $2.5 billion between June and September.

The economy grew 2.8 percent in the first quarter from a year earlier, trailing expansion of 4.1 percent in Chile and 4.8 percent in Peru, while outpacing Brazil’s 1.9 percent and Mexico’s 0.8 percent.

Cano said that he was expressing his own opinion, and could not speak for the other six members of the central bank’s policy committee.

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