Colombia Dissenting Interest Rate Decision Signals Further Cuts
More than one of Colombia’s seven central bank board members voted for a bigger interest-rate cut than the majority agreed to last month, fueling speculation that further reductions are likely. The peso fell.
Policy makers, led by bank Governor Jose Dario Uribe, settled on a reduction in the overnight lending rate by a quarter percentage point to 4.25 percent. While some dissenters voted for a half-point cut, another favored no change, according to minutes of the Dec. 21 meeting released today. Only 11 of 32 analysts surveyed by Bloomberg had forecast the quarter-point cut, while 21 expected rates to stay on hold.
Policy makers, citing the weakening global economy, have lowered interest rates at four of their last six board meetings, tying Colombia with Peru for the lowest borrowing costs among major economies in Latin America. The economic weakness means more rate cuts are likely, said Alejandro Reyes, the head analyst at brokerage Ultrabursatiles SA in Bogota.
“The Colombian economy is facing a slowing cycle, but not too far beyond its potential,” Reyes said in a telephone interview. “We see probably there’s space for a 25 to 50 basis points cut in the first half of 2013.”
The peso fell 0.5 percent to 1,771 per U.S. dollar, weakening for the first time in three days and extending its loss after the minutes were released. The yield on Colombia’s 10 percent peso-denominated debt due in July 2024 rose two basis points, or 0.02 percentage point, to 5.68 percent, according to the central bank.
“The market is reacting to the minutes,” said Juan Pablo Colmenares, a currency trader in Bogota at Corp. Financiera Colombiana. “A greater chance of more cuts is leading the peso to correct those strong levels we saw earlier this week.”
Colombia’s growth rate fell to a three-year low in the third quarter and inflation slowed below the mid-point of the central bank’s target range in November for the first time since April 2011.
“GDP growth data for the third quarter points to a slowdown in economic activity that’s bigger than was expected, indicating a possible excess in productive capacity,” the board said in the minutes released today. The members who supported a bigger cut emphasized that “almost all indicators on the progress of the economy denote an apparent deterioration.”
The central bank expects inflation to remain below its 3 percent target for “some time,” the board said in today’s minutes. The economy may have grown less than 4 percent last year, and growth should accelerate in 2013, it said.
Gross domestic product 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.
Colombia’s urban unemployment rate of 9.8 percent as of November is the highest among major Latin American economies tracked by Bloomberg.
The inflation rate in November fell to a two-year low of 2.77 percent on cheaper food and transport costs, showing that the El Nino weather phenomenon didn’t cause the gain in food prices that some economists had forecast and that the central bank was right to cut interest rates in November, Finance Minister Mauricio Cardenas said in a Dec. 5 interview. Colombia targets inflation of 3 percent, plus or minus one percentage point.
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.
“The bank’s statement shows an interesting divergence amongst its decision makers, but clearly the authorities are concerned with the deceleration in activity,” Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York, wrote in an e-mailed note to clients today. “Inflation trends appear benign and should stay so for some time. The generally dovish stance should signify at least one additional rate cut to come.”
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