Colombia Leaves Rates Unchanged and Extends Dollar Purchases

Colombia kept borrowing costs unchanged for a second straight month as policy makers gauge whether Latin America’s lowest interest rate and a government stimulus package will reverse a slowdown in growth. It also extended a program of dollar purchases until September.

Banco de la Republica, led by Governor Jose Dario Uribe, held its benchmark interest rate at 3.25 percent today in line with the forecast of all 31 analysts surveyed by Bloomberg. Uribe said the decision was unanimous.

The central bank has cut borrowing costs seven times over the past year, as industrial output slumped and the growth rate fell to the lowest in the Andean region. After today’s rate decision, Uribe told reporters that the looser monetary policy and a fiscal stimulus program will bring growth close to its potential by the end of the year.

“The available indicators suggest that second quarter growth was faster than in the first quarter,” Uribe said. “It’s expected that Colombia’s economic growth will accelerate during the year as aggregate demand responds to previous monetary policy measures and to the programs announced last month by the government.”

The economy probably grew less than 3 percent in the first quarter from a year earlier, Uribe said, and probably accelerated in the following three months.

Dollar Purchases

The bank will buy at least $2.5 billion over the next four months, compared with $3 billion in the previous period, Uribe said. Colombia needs higher levels of reserves regardless of the peso’s level, Uribe said, adding that policy makers would welcome a further decline in the currency.

“It’s a little bit surprising that they’re lowering the rate of purchases,” said Munir Jalil, head analyst at Citigroup Inc.’s Colombia unit. “It means there are people within the board who may be talking about changing this policy as they see stability in the currency.”

The peso weakened 0.7 percent to 1902.48 per dollar today. The currency has depreciated 7.1 percent this year, the biggest fall among major Latin American currencies tracked by Bloomberg after the Venezuelan bolivar. The yield on the nation’s benchmark peso bonds due 2024 jumped 85 basis points, or 0.85 percentage point, this month to 5.72 percent.

Last month, the government of President Juan Manuel Santos announced a 5 trillion-peso ($2.6 billion) stimulus plan, of which $900 million will be spent in 2013. The measures, which includes an expansion of a housing program for low-income families and cheaper energy costs, will boost 2013 growth by 0.7 percentage point, according to the Finance Ministry.

Growth Forecast

The economy grew 4 percent last year, the slowest pace in the Andean region. Uribe said April 29 that gross domestic product can grow between 4.1 percent and 5.1 percent per year without fueling inflation.

The central bank last month raised its 2013 forecast for growth to 4.3 percent from 4 percent. Still, industrial output fell 11.5 percent in March from a year earlier, its fifth straight contraction.

Annual inflation rose to 2.02 percent in April, returning to the central bank’s 2 percent to 4 percent target range. In February, the inflation rate fell to 1.83 percent, its lowest level since 1955.

Consumer prices will rise 3.14 percent over the next year, according to a May central bank survey of economists, up from a

3.02 percent forecast in April.

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