Colombia Holds Key Rate at 4.5% and Slows Dollar Purchases

Colombia’s central bank kept its benchmark interest rate unchanged and slowed its dollar purchase program after economic growth eased and the peso weakened to a six-month low.

The seven-member board left the policy rate at 4.5 percent, after five consecutive quarter-point increases, bank Governor Jose Dario Uribe told reporters in Bogota. The decision, which was not unanimous, was forecast by 31 of 37 analysts surveyed by Bloomberg, with six expecting an increase.

A weak global economy and falling prices for Colombia’s oil exports are offsetting higher-than-forecast domestic demand, policy makers said. Internal demand enabled Colombia to remain the fastest growing major economy in South America in the second quarter, even as growth slowed to 4.3 percent from 6.5 percent in the previous three months.

Internal demand “is very dynamic, and this has allowed us to offset weakness in external demand,” said Finance Minister Mauricio Cardenas, who sits on the policy committee. “This has been Colombia’s winning formula.”

While growth remains robust and interest rates have risen, the prospect of higher borrowing costs in the U.S. has pushed down the peso.

Uribe said the central bank would limit dollar purchases to $1 billion in the fourth quarter, after buying $1.93 billion so far between July and September.

Peso Weakness

The peso closed little changed at 2,017.70 per dollar in Bogota trading, weakening 2.3 percent this week, the worst performance among 24 Emerging Markets currencies tracked by Bloomberg.

Annual inflation accelerated to 3.02 percent in August, ending almost two years of below-target price increases. Colombia targets annual inflation of 3 percent, plus or minus one percentage point.

“Aggregate demand continues to show strong dynamism in a context of near-full use of productive capacity,” Uribe said, reading the policy statement. “Inflation expectations remain around 3 percent.”

Colombia’s second-quarter growth compared with 1.9 percent in Chile, 1.7 percent in Peru and a contraction of 0.9 percent in Brazil.

“The uncertainty over the external sector was probably the strongest argument for holding interest rates,” said Munir Jalil, head analyst at Citigroup’s Colombia unit. “The central bank will be, from now, very focused on new data, mostly in what happens in the external sector.”

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