Colombia Cuts Rate to 4% And Steps Up Daily Dollar Purchases

Colombia cut interest rates to the lowest level in Latin America to boost below-potential economic growth, while increasing daily dollar purchases to curb the peso’s appreciation.

Banco de la Republica, led by bank Governor Jose Dario Uribe, reduced its benchmark interest rate by a quarter point to 4 percent, as forecast by 31 of 33 analysts surveyed by Bloomberg. Two predicted no change. After announcing the decision, Uribe said Colombia will boost daily dollar purchases to at least $30 million and will buy $3 billion between February and May.

“Colombia’s economy is growing below its potential while inflation has fallen below the 3 percent midpoint of the target range,” policy makers said in their statement posted on the central bank’s website. Uribe said all seven board members wanted to cut the rate even though the vote today wasn’t unanimous.

Policy makers have lowered borrowing costs at five of their last seven board meetings, as the economy grew at the slowest pace in the Andean region, while inflation fell to its lowest level since 2010.

‘More Cuts’

The language of the statement suggests that “there could be more cuts ahead,” said Camilo Perez, said Camilo Perez, the head analyst at Banco de Bogota SA.

“The chances of another rate cut are clearly greater now,” Perez said, speaking in a telephone interview from Bogota. “Their forecast shows there are risks of slower growth this year.”

Perez said his forecast remains is that policy makers will hold the policy rate at 4 percent, even though the chances of a cut have risen.

The central bank said today that it expects the economy to expand between 2.5 percent and 4.5 percent this year, with growth of 4 percent the most probable outcome.

Annual inflation slowed to 2.44 percent in December, from 2.77 percent the month before. Three measures of so-called core inflation tracked by the central bank, which exclude the most volatile prices, all slowed last month.

Colombia targets consumer price increases of 3 percent, plus or minus one percentage point.

‘Clear Signs’

Industrial output slumped 4.1 percent in November from the year-earlier period, the biggest decline since July 2009, the government said Jan. 18. That was weaker than all 21 forecasts compiled by Bloomberg.

The economy grew 2.1 percent in the third quarter from a year earlier, the slowest pace in the Andean region. The result was weaker than the 3.3 percent to 4.8 percent range the central bank had forecast.

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.

The economy’s weak performance means the central bank will probably cut interest rates again at its February meeting, said Nader Nazmi, senior Latin America economist at BNP Paribas, who had predicted today’s move.

“There are clear signs that the economy is not turning around yet, and the most recent was the weakness in industrial production,” Nazmi said in a Jan. 25 telephone interview. “Inflation is under control, so the cost of cutting right now is basically nil.”

Before it's here, it's on the Bloomberg Terminal.