Colombia Holds Interest Rate Amid Emerging Market Sell-Off

Colombia kept borrowing costs unchanged for a 10th straight month on expectations that the peso’s three-week slump won’t trigger an inflation spiral.

Banco de la Republica’s seven-member policy committee, led by bank Governor Jose Dario Uribe, voted unanimously to hold the benchmark rate at 3.25 percent, the lowest in Latin America, as forecast by all 28 analysts surveyed by Bloomberg.

“We see this recent fall in the peso as something positive,” Uribe said at a news conference following the decision. “The transmission from the exchange rate to prices in Colombia is a lot lower than it used to be,” and Colombia has an “enormous” margin for the peso to weaken before posing a threat to the bank’s inflation target, Uribe said.

The peso weakened to a 3 1/2-year low this week amid a sell-off in emerging markets, as the U.S. unwinds stimulus policies that have fueled demand for assets in emerging markets. Colombia’s inflation rate, which fell to a six-decade low in November, puts the country in a “more comfortable” position than many of its peers, where a devaluation could push inflation above target, central bank co-director Ana Fernanda Maiguashca said in a Jan. 24 interview.

Turkey, South Africa and Brazil raised interest rates this month, as all 24 major emerging market currencies tracked by Bloomberg fell. The U.S. Federal Reserve this week said it will trim its monthly bond buying by $10 billion to $65 billion, as it phases out record levels of monetary stimulus. Signs that Chinese growth is cooling contributed to the sell-off.

1950s Inflation

“A key difference between Colombia and other emerging nations is that inflation is very low, and this gives them a lot of space before devaluation stokes inflation,” said Mario Castro, a strategist at Nomura Holdings Inc., in New York.

The currency would need to weaken a further 7 percent, and remain at that level for several months, before creating an inflation threat, Castro said in a phone interview yesterday.

Colombia cut borrowing costs seven times between July 2012 and March, as inflation slowed to levels not seen since the 1950s. Policy makers’ next move will be to raise the key rate to 3.75 percent in July as economic growth picks up, according to the most recent central bank survey of economists.

The peso has weakened 4.1 percent since the bank’s Dec. 20 board meeting, the biggest drop among major Latin American economies after the Argentine peso, pushing up the cost of imports.

Inflation Target

In an interview in Davos last week, President Juan Manuel Santos said the central bank’s dollar purchases are no longer justified. At its December board meeting, the bank pledged to buy as much as $1 billion in the first three months of the year, on top of $6.8 billion it bought in auctions last year.

Finance Minister Mauricio Cardenas, who chairs the central bank’s policy meetings, said in a radio interview yesterday that the central bank may stop its foreign currency intervention.

The economy grew 5.1 percent in the third quarter from a year earlier, led by construction and coffee output. The expansion was faster than Brazil, Mexico, Peru, Chile and Venezuela, while lagging Argentina’s 5.5 percent growth.

Even as growth accelerated, consumer price rises have remained below the lower bound of the central bank’s target range of 2 percent to 4 percent. Annual inflation accelerated to 1.94 percent in December, from a six-decade low of 1.76 percent in November.

The economy grew 4.5 percent in the last three months of 2013, and will grow 4.3 percent this year, according to central bank forecasts.

Inflation will return to 3 percent by 2015, central bank co-directors Cesar Vallejo and Carlos Gustavo Cano said in a Jan. 14 interview.

Before it's here, it's on the Bloomberg Terminal.