Colombia Keeps 4.5% Rate as Oil Drop Set to Curb Growth

Colombia’s central bank kept its benchmark interest rate unchanged for the third straight month as a slump in oil prices threatens to damp growth in South America’s fastest-growing economy.

The seven-member board voted unanimously to hold the overnight lending rate at 4.5 percent, bank Governor Jose Dario Uribe told reporters in Bogota after the meeting today. The decision was forecast by all 31 analysts surveyed by Bloomberg.

“Aggregate demand continues to show strong growth in a contact of near-full use of productive capacity,” Uribe said. “This is happening in a context of weakening terms of trade and growing uncertainty over the global economic recovery and financing costs, factors that could impact aggregate demand and the exchange rate.”

The price of oil, which accounts for more than half of Colombia’s exports, fell to the lowest in more than four years yesterday, extending a decline that Uribe has said is his biggest concern. The bank raised rates by 1.25 percentage points from April to August, as the economy grew at the fastest pace among major economies in the region and inflation accelerated.

The current policy rate is “probably” stimulating growth, and is “clearly not” acting as a brake on the economy, Uribe said.

External Risks

The peso has weakened 7.3 percent over the last month, the worst performer among major emerging market currencies tracked by Bloomberg after the ruble. Uribe said the weaker currency will have a one-off impact on inflation, rather than a lasting effect, and reiterated the bank’s 3 percent inflation forecast for 2015.

The drop in the peso will help Colombian industry, helping to offset the effects of the lower oil price, said Finance Minister Mauricio Cardenas, who chairs central bank policy meetings. The government forecasts manufacturing growth of 4 percent next year, Cardenas said.

Oil prices have slumped as the U.S. pumps at the fastest rate in more than three decades and Saudi Arabia and other leading producers resist calls to curb supply. In a meeting in Vienna yesterday, the Organization of the Petroleum Exporting Countries took no action to ease the global oil-supply glut.

“The bank won’t take a decision on interest rates until the magnitude of this shock is fully confirmed, and looks like persisting for a long time,” said Munir Jalil, head analyst at Citigroup Inc.’s Colombia unit. “We are forecasting that they’ll hold the rate throughout 2015, but if this shock is maintained at these levels, it will probably generate slower growth and, to the extent that the inflation rate allows, it could open a space for the bank to think about a rate cut.”

As a result of the fall in crude prices, the government is pushing to raise taxes to try to plug a 12.5 trillion-peso ($5.6 billion) funding gap next year that is equivalent to 1.6 percent of gross domestic product.

The economy will grow 4.9 percent this year according to analysts surveyed by Bloomberg, outpacing Peru, Chile, Mexico and Brazil. Inflation accelerated to an annual pace of 3.29 percent in October. Colombia’s central bank targets inflation of 3 percent plus or minus one percentage point.

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