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Colombia Holds Key Rate at 3.25% as Consumer Spending Cools

Nov. 29 (Bloomberg) -- Colombia held borrowing costs at the lowest level in Latin America for an eighth straight month as consumer spending growth cooled and inflation unexpectedly slowed below the lower band of its target range.

Banco de la Republica, led by Governor Jose Dario Uribe, left its policy rate at 3.25 percent, as forecast by 28 of 29 analysts surveyed by Bloomberg. The other analyst expected a quarter-point cut to 3 percent, matching the record low held between April 2010 and February 2011. The decision was unanimous.

“Consumer inflation had a sharp and unexpected drop in October, explained mainly by a temporary fall in the pace of food-price rises,” Uribe said, reading the bank’s policy statement. “The interest rate remains at a level that stimulates aggregate demand.”

Colombia reduced interest rates seven times between July last year and March, the deepest cuts in the region, as manufacturing industry slumped and inflation slowed to its lowest level since the 1950s. Policy makers will leave interest rates at their current expansionary level until August, when they probably will see stronger evidence that the economy has recovered, said Juan Pablo Espinosa, head of economic research at Bancolombia SA, Colombia’s biggest bank.

Consolidation Needed

“The economy still needs to consolidate this trend of recovery,” Espinosa said in a phone interview yesterday. “The inflation rate gives the central bank ample room for manouver, allowing them to keep an expansionary monetary policy for an additional period.”

Consumer prices rose 1.84 percent in October from a year earlier, the slowest rate of increase since February, when the inflation rate touched a six-decade low. Colombia targets inflation of 3 percent plus or minus one percentage point.

Chile, Peru and Mexico have all cut interest rates in the past three months as growth slows and inflation remains subdued. The European Central Bank has also eased its monetary policy as it looks to revive expansion.

The Colombian economy will grow 4.4 percent in the third quarter from a year earlier, according to the median forecast of nine analysts surveyed by Bloomberg, compared with 4.7 percent growth in Chile and 4.4 percent in Peru.

Urban unemployment in Colombia fell to 8.7 percent in October from 9.9 percent the previous month, the national statistics agency said today. That’s its lowest level since at least Jan. 2000, and was lower than all 14 forecasts in a Bloomberg survey.

Sluggish Growth

While the jobless rate falls, other indicators still point to sluggish growth. Annual retail sales growth slowed to 2.3 percent in September, from 6.9 percent in August, while industrial output contracted 1.8 percent from a year earlier, its seventh contraction this year.

With growth remaining weak, inflation is likely to remain subdued. Two measures of core inflation tracked by the central bank, which aim to capture underlying trends by excluding the most volatile prices, fell to record lows last month.

At his presentation of the central bank’s quarterly inflation report this month, Uribe said inflation is “very likely” to end the year below 2.4 percent.

To contact the reporter on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net

To contact the editor responsible for this story: Matthew Bristow at mbristow5@bloomberg.net

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