Colombia Cites Weak Consumer Demand in March Rate Cut Decision

Colombian policy makers cited weak demand for the country’s exports, low inflation expectations and signs that household demand is cooling for last month’s surprise half point interest rate cut.

“In the first quarter of 2013, the deterioration in trade expectations, as well as the fall in the consumer confidence index and sales of automobiles suggest a lower performance in private consumption,” the central bank said today in the minutes to its March policy meeting.

Business confidence indicates that industrial activity will continue to shrink, suggesting that “current economic growth is below its potential and, therefore, the constraints on the use of productive capacity are increasing,” the bank said.

Colombia has cut interest rates seven times since June to the lowest among major Latin American economies, as growth cooled and the inflation rate fell to a six-decade low. The minutes leave the door open to further cuts if the central bank judge them to be necessary, said Alejandro Reyes, head analyst at Ultrabursatiles SA brokerage.

“The bank will wait to see the impact of these measures, and the effect on interest rates and on the economy,” Reyes said in a phone interview.

The bank will probably hold the rate at 3.25 percent until the end of the year, Reyes said, adding that, “if inflation remains low, and growth remains mediocre, nothing has changed, and they could continue to cut interest rates without a problem.”

Inflation-Growth Dynamic

The central bank unexpectedly accelerated the pace of interest rate cuts at its March 22 policy meeting with the first half-point cut in almost three years, saying that monetary stimulus is reaching the economy at a slower pace than is desirable.

Inflation accelerated to 1.99 percent last month, according to the median forecast in a Bloomberg survey of 24 analysts, from a six decade-low of 1.83 percent in February. The statistics agency reports March inflation later today.

The economy expanded 3.1 percent in the fourth quarter from a year earlier, the slowest pace in the Andean region. Gross domestic product will increase 2.5 percent to 4.5 percent in 2013, according to the central bank’s forecast.

The peso appreciated 0.5 percent to 1819.73 per U.S. dollar in Bogota today. The currency has weakened 2.9 percent this year, the biggest fall among major Latin American economies after Venezuela and Argentina.

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