Colombia’s central bank makes bigger-than-expected cut

Reuters, BOGOTA

Sun, Mar 24, 2013 - Page 13

Colombia’s central bank cut its benchmark lending rate by a larger-than-expected half a percentage point on Friday, its fifth straight reduction, taking advantage of benign inflation to stimulate the sluggish economy.

The seven-member board, led by Colombian central bank governor Jose Dario Uribe, stepped up the pace of cuts in a unanimous decision, taking the rate to 3.25 percent following quarter-point reductions in previous months.

In a Reuters survey of 21 economists, 17 expected a quarter-point cut, while the rest saw the bank holding the rate steady at 3.75 percent.

“The decision was taken considering the Colombian economy is growing below its potential and will probably operate in the coming quarters below its productive capacity, and observed and projected inflation is falling below the target of 3 percent,” the central bank said in a statement.

With GDP growth well off its expansion levels in 2011, the central bank has tried to promote more investment from Colombian consumers and corporations by cutting 200 basis points from the lending rate since the middle of last year.

“Interest rate reductions appear to be being transmitted to the economy more slowly than hoped for,” the statement added.

Data on Thursday showed the economy grew a better-than-expected 4 percent last year, among the fastest rates in the world, but much slower than the 6.6 percent pace the previous year.

Inflation below the bottom end of the central bank’s target range of between 2 percent and 4 percent has given ample space for the rate cuts. At 3.25 percent, Colombia’s interest rate is the lowest in Latin America.

Annual inflation through last month was 1.83 percent.

“Growth is still below potential while inflation in January and February suggests a deterioration in aggregate demand,” said Cristian Lancheros, an analyst at Acciones y Valores.

Investment in Colombia has soared over the last decade, mostly in the oil and mining industries, reaching record levels and boosting the peso as security improved following a US-backed offensive against rebel groups.

Expansion started to flag last year due to after-effects from the global financial crisis. Industrial production became a concern for the government just as the jobless rate began to improve. The government expects this year’s growth to reach 4.8 percent.

“We are satisfied with the growth level, but that doesn’t make us complacent, there are sectors that need help, industry needs help, measures,” Colombian Finance Minister Mauricio Cardenas, who had called for a rate cut, told reporters late on Thursday.

Manufacturing fell in seven out of 12 months last year, and retail sales remained weak. Exports have fallen in six of the past 12 months.