Colombia Holds Interest Rates and Leaves Door Open for Cut

Colombia kept its key interest rate close to a record low for a fifth month as industry contracts and strikes and protests threaten to disrupt production further. Some policy makers voted to cut borrowing costs.

Banco de la Republica, led by Governor Jose Dario Uribe, held its benchmark interest rate at 3.25 percent, as forecast by all 29 analysts surveyed by Bloomberg. The rate has only been lower once, when it was held at 3 percent between April 2010 and February 2011.

“Interest rates are at a level that stimulate the economy,” the bank said in its policy statement. “Having evaluated the balance of risks, without ruling out the possibility of a reduction in the policy rate, the board considered it appropriate to hold the rate at 3.25 percent.”

The central bank cut the rate by 2 percentage points in the nine months through March as inflation slowed to its lowest level since 1955 and economic growth cooled. Finance Minister Mauricio Cardenas, who chairs the bank’s seven-member policy committee, said a further interest rate cut would help revive the Andean nation’s industrial sector.

“We said it’s possible that an additional reduction in interest rates is needed,” Cardenas told reporters in Bogota after the decision. The nation’s industry “still worries us. We believe it’s important to stimulate internal demand, and, of course, a reduction in interest rates is the best way of doing that.”

Industrial output fell 5.5 percent in June from a year earlier, its seventh contraction in eight months.

‘Dovish’ Tone

Today’s more “dovish” tone from the central bank policy statement will be positive for local peso bonds, said Andres Pardo, head analyst at Corporacion Financiera Colombiana, or Corficolombiana.

“The probability that they will cut rates over the next few months, in the very short term, is higher than it was before,” Pardo said in a phone interview. “The fact that inflation is controlled gives the central bank space to have an expansionary monetary policy.”

Three-month interest rate swaps fell 4 basis points after the statement, to 3.14 percent.

Police fired tear gas at demonstrators in central Bogota yesterday, as students and other groups joined anti-government protests by farmers and truck drivers. Schools were shut, while city authorities imposed curfews and alcohol bans in some neighborhoods and the army was deployed to support the police.

Mounting Protests

Coffee growers, dairy farmers and other producers have been protesting and blocking highways since Aug. 19 over President Juan Manuel Santos’ farm and trade policies. Truckers angered by high fuel costs have joined the demonstrations.

The unrest will probably curb economic growth this quarter as consumers rein in spending, said Camilo Perez, chief economist at Banco de Bogota.

“All of this social instability that we are living through will definitely impact consumer confidence and in the third quarter could have an adverse impact on growth,” Perez said yesterday in a phone interview from Bogota.

Prices of potatoes, onions and other staples have jumped in wholesale markets since the protests started. Cardenas said the central bank’s board isn’t worried that the protests will generate inflation. Farmers’ leaders today agreed to lift their blockades of highway, even as they continue their protest.

Economic Growth

The economy grew 2.8 percent in the first quarter from a year earlier, trailing expansion of 4.1 percent in Chile and 4.8 percent in Peru, while outpacing Brazil’s 1.9 percent and Mexico’s 0.8 percent. The central bank last month cut its forecast for 2013 gross domestic product growth to 4 percent, from 4.3 percent.

Growth will also be hit by a strike at Drummond Co., the country’s second-biggest coal producer. The U.S. company’s Colombian mine, rail and port workers have been on strike since July 23 in a dispute over pay and conditions, which Drummond said will probably last until October. Coal is Colombia’s biggest export after oil.

The annual inflation rate rose to an eight-month high of

2.3 percent this month, according to the median forecast in a Bloomberg survey of nine analysts, up from 2.22 percent in July.

In February, annual inflation slowed to 1.83 percent, its weakest pace since 1955. Colombia targets annual consumer-price rises of 3 percent, plus or minus one percentage point.

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