Colombia Growing More Than Expected Allays Call for Rate Cut

Colombia’s economic growth quickened in the second quarter more than forecast by all analysts, cementing expectations that the central bank will leave interest rates unchanged this month.

Gross domestic product expanded 4.2 percent from a year earlier, up from a revised 2.7 percent in the first quarter, the national statistics agency said today in Bogota. The gain was more than predicted by the 31 analysts surveyed by Bloomberg, whose median estimate was 3.4 percent. The economy expanded 2.2 percent from the previous quarter.

The faster-than-expected expansion reinforces the call of the majority of the seven-member central bank board who argued against additional interest rate cuts last month, said Julio Romero, an analyst at Corporacion Financiera Colombiana, or Corficolombiana. Policy makers have kept borrowing costs on hold since April to gauge the combined impact of near-record low interest rates and a $2.6 billion stimulus package aimed at boosting growth.

“This positive number will certainly strengthen the hand of the board members who voted to hold interest rates,” said Romero, who had predicted second-quarter growth of 3.9 percent. “The bank was clear in its minutes that they would pay a lot of attention to these figures.”

The central bank cut its policy rate by 2 percentage points between July 2012 and March, to the lowest among major Latin American economies in a bid to reverse an economic slowdown.

Policy makers held borrowing costs at 3.25 percent last month, saying they could consider a cut after having more information on second-quarter GDP growth and U.S. monetary policy. The bank had forecast second-quarter growth of 3.4 percent.

Swap Rates

One-year interest rate swaps climbed 0.06 percentage point after the report was published, to 3.42 percent, as traders pared bets on interest rate cuts.

The expansion was led by a 7.6 percent rise in agricultural output, and a 6.4 percent increase in construction. Industry expanded 1.2 percent from a year earlier, after contracting over the previous four quarters.

Oil and natural gas output rose 7.2 percent, while coal output fell 5.4 percent and gold fell 10.3 percent.

Five of 10 analysts surveyed by Bloomberg forecast a quarter-point interest rate cut at the central bank’s Sept. 27 policy meeting, while one analyst predicts a half-point cut and four forecast that the central bank will leave the policy rate unchanged at 3.25 percent. The survey was taken before today’s GDP report.

Fed Surprise

The U.S. Federal Reserve unexpectedly announced yesterday that it will continue its $85 billion of monthly bond purchases, leading the peso to strengthen 1.3 percent to 1,882.13 at 12:45 p.m. local time. Economists had forecast it would dial down monthly Treasury purchases by $5 billion, according to a Bloomberg News survey.

Colombia’s second-quarter growth compares with a 5.6 percent expansion in Peru, 4.1 percent in Chile and 1.5 percent in Mexico.

At least two people on the central bank’s policy committee last month argued that slow inflation created room for interest rate cuts to boost growth, according to its minutes. Finance Minister Mauricio Cardenas, who chairs the board meetings, said he argued for a cut.

Consumer prices rose 2.27 percent in August from a year earlier, from 2.22 percent in July, while one gauge of monthly “core” consumer prices, which excludes the most volatile goods, fell for the first time in two years. In February, the inflation rate dropped to 1.83 percent, its lowest level since the 1950s. Colombia targets inflation of 3 percent, plus or minus one percentage point.

President Juan Manuel Santos announced in April a 5 trillion-peso ($2.6 billion) stimulus package aimed at “reactivating” the industrial sector and boosting growth by 0.7 percentage point this year.

GDP will climb 4.05 percent this year and 4.65 percent next after expanding an average of 4.7 percent over the past decade, according to analysts polled by Bloomberg.

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