Colombia Holds Key Rate at 4.5% With Growth at Two-Year Low

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Colombia kept borrowing costs unchanged for a 10th straight month as a widening current account gap deters policy makers from trying to stimulate the slowing economy.

The seven-member board voted unanimously to hold the benchmark rate at 4.5 percent, central bank Governor Jose Dario Uribe told reporters Wednesday in Bogota. The decision was forecast by all 32 economists surveyed by Bloomberg.

The economy grew at the slowest pace in two years in the first quarter, as manufacturing and mining output fell. At the same time, a slump in oil and coal prices has pushed Colombia’s current account deficit to the widest in 16 years, making policy makers wary about stoking demand that would suck in more imports. Still, if data remain weak the central bank will cut rates in August, said Francisco Rodriguez, senior Andean economist at Bank of America Corp.

“Growth data is going to continue to disappoint,” Rodriguez said in reply to e-mailed questions. “Two more months of negative surprises should be enough to get them to change their stance.”

Retail sales unexpectedly fell in April from the year earlier for the first time in three years, while industrial production tumbled 3.6 percent, compared with the drop of 0.4 percent forecast by analysts.

Expansionary Policy

“The available information for the second quarter suggests that the economy continues to adjust to new external conditions and that household consumption could be showing moderate growth rates,” Uribe said, reading the policy statement. “This is happening with a strong labor market and real interest rates that remain expansionary.”

Weaker domestic demand hasn’t prevented a wider current account deficit. The broadest measure of the trade in goods and services posted a shortfall equivalent to 5.2 percent of gross domestic product last year, up from 3.2 percent in 2013.

Central bank co-director Cesar Vallejo said last week in Cartagena that the shortfall is the “most shocking” economic indicator at the moment, raising the risk of capital outflows when the U.S. Federal Reserve raises interest rates. The central bank forecasts that the deficit will widen to as much as 6.1 percent of GDP this year.

Colombia’s economy will grow 3.3 percent this year, the fastest among major Latin American economies after Peru, according to the median estimate of 27 analysts surveyed by Bloomberg. Economists expect policy makers to cut interest rates in March of next year according to the most recent central bank monthly survey.

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