Colombia Holds Policy Rate at 3.25% and Raises GDP Forecast

Colombia held borrowing costs unchanged for a seventh straight month as policy makers said the economy was picking up, reducing the need for further stimulus measures.

Banco de la Republica, led by Governor Jose Dario Uribe, left its policy rate at 3.25 percent, the lowest in Latin America, as forecast by 31 of 32 analysts surveyed by Bloomberg. The other economist expected a quarter-point cut to the record low of 3 percent, where the rate was held between April 2010 and February 2011.

Colombia reduced its key rate seven times between July last year and March, the deepest cuts in the region, as the central bank took advantage of the slowest inflation since the 1950s to provide extra stimulus. With inflation set to return to the midpoint of its target range in March or April next year and growth accelerating, the central bank’s next move will be to raise borrowing costs in April, said economist Munir Jalil.

“It’s becoming harder and harder to think about a cut,” said Jalil, head analyst at Citigroup Inc.’s Colombia unit. “From the monetary policy point of view the job is done.”

The central bank raised its forecast for 2013 economic growth to between 3.5 percent and 4.5 percent, up from a previous range of 3 percent to 4.5 percent. Growth is being driven by construction, agriculture, mining and trade, Uribe told journalists today.

Investment Driven

“Available third-quarter data suggest economic activity that expands at a faster pace than in the first half of the year, driven by investment,” Uribe said, reading the central bank’s policy statement. “Current interest rates are at levels that stimulate aggregate demand.”

Colombia will raise the policy rate to 4 percent by next September, starting with a quarter-point increase in March, according to a central bank monthly survey of economists published Oct. 11. Chile and Mexico both cut borrowing costs in the past two months, while Brazil has raised rates to rein in consumer prices.

Uribe also cited signs of faster growth in the Euro area and a reduced chance that the U.S. Federal Reserve will cut its asset purchase program, in the decision to leave the policy rate unchanged. At the same time, policy makers said risks to Colombia’s growth “aren’t negligible” and “could have increased recently.”

‘Downside Risks’

At the central bank’s August board meeting, a minority of policy makers, including Finance Minister Mauricio Cardenas, argued for a rate cut, citing “downside risks” to growth, and the chance that the U.S. would tighten monetary policy.

Cardenas, who chairs the central bank’s policy committee, in September dropped his call for a cut after second-quarter growth exceeded expectations and the U.S. Federal Reserve said it would continue its asset purchase program at the same pace.

In an Oct. 14 interview, Cardenas said a low inflation rate means Colombia should maintain its current policy for “some time.”

The economy grew 4.2 percent in the second quarter from a year earlier, faster than forecast by all 31 analysts surveyed by Bloomberg. Retail sales increased 6.9 percent in August from a year earlier, the biggest gain since March 2012, while exports climbed 8.9 percent led by coal and oil.

Inflation stayed below the 3 percent midpoint of the target range for the 11th consecutive month in September, when it was unchanged at 2.27 percent. In February, the inflation rate dropped to 1.83 percent, its lowest level in six decades.

Even as household demand picks up, industrial production remains weak. Output fell 3.9 percent in August from the year earlier, more than forecast by all 21 analysts in a Bloomberg survey.

Manufacturers have been hurt by a 26 percent gain in the peso over the past five years, the biggest rally among major emerging market currencies tracked by Bloomberg after the South Korean won and the Chilean peso.

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