UPDATE 5-Colombia cuts interest rate again on growth risks

Fri Feb 22, 2013 3:31pm EST

* Low inflation may give room for more stimulus

* Economy growing below its potential

* Concern over investment in civil works (Adds comment, detail)

By Jack Kimball and Helen Murphy

BOGOTA, Feb 22 (Reuters) - Colombia's central bank cut its benchmark lending rate for a fourth straight month on Friday to support the slowing Andean economy and signaled further easing given benign inflation.

Policymakers reduced the key interest rate a quarter point to 3.75 percent, meeting economists' expectations. Inflation has stayed well within the bank's target range of 2 percent to 4 percent, hitting the bottom end in January.

More cuts could be in the offing based on comments by central bank chief Jose Dario Uribe and the tone of the statement, suggesting difficult days ahead for Latin America's fourth largest economy.

"Economic growth in the first quarter of 2013 will be affected by less working days in the period, as well as supply shocks recorded in coal exports and the risk of lower demand from Venezuela," he said after announcing the rate decision.

The vote was unanimous by the five members present at the meeting. The board usually has seven directors but two recently stepped down after their terms expired.

Since July, the monetary authority has lopped 150 basis points off its overnight lending rate, the lowest in the region, in a bid to boost the economy which is growing slower than expected.

"The decision was taken considering that the Colombian economy is growing below its potential, observed and projected inflation is falling below the target of 3 percent and there is no looming upward pressure seen on it in the near future," the bank said in a statement following its decision.

Economists interpreted the statement's tone as meaning there may be more cuts in the coming months.

"Overall, the bank's language suggests that board members are ready to cut rates further to 3.5 percent," 4Cast said in a note to investors after the announcement. "Additional cuts may follow beyond 3.5 percent to 3.0 percent, but that will depend on fresh data."

Andres Pardo, head of economic research at Corficolombiana, also saw the possibility of more cuts.

"The statement is a bit less bearish than last month, but I think it still leaves the door open to a further reduction in rates," he said.

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 U.S.-backed offensive against rebel groups.

That expansion has started to flag, with industrial production becoming a concern for the government just as the the jobless rate begins to improve.

"Uncertainty over investment, in particular civil works and construction of buildings, remains high," the statement said. "On the offer side, leading industrial indicators suggest another fall in production in December, while those of retail indicate acceptable growth."

Uribe has blamed increased environmental requirements and delays in permits for the poor performance in civil works, a category which includes highways and bridges. He also has raised concern about the impact that labor disputes in the coal mining sector may have on growth.

Industrial production decreased in six of the reported months through November. Retail sales remained weak last year, although they picked up in November. December data will be published later on Friday.

INFLATION RATE SLOWDOWN

The central bank has lowered its estimate for 2012 economic growth several times. It currently expects 3.3 percent to 3.9 percent, slowing from 5.9 percent growth in 2011.

Policymakers see growth in gross domestic product at between 2.5 percent and 4.5 percent this year, with 4 percent being the most likely figure.

The central bank, independent under the constitution, is charged with keeping inflation under control and keeping it within its target range.

"There is plenty of space from inflation to cut the rate again," said Munir Jalil, chief economist at Citibank's Colombia office, before Friday's rate announcement.

"With one more cut next month, we expect to see the economy moving again, with expansion in the second half."

If consumer prices decline too much, however, Colombians may hold off on purchases on expectations that goods will become less expensive, causing the economy to stall further.

President Juan Manuel Santos named two new board members on Thursday to replace out-going directors. The new members, who are considered more expansionist in their thinking, will participate in next month's policy meeting.

"The slowdown in inflation, more than expected, has occurred in a context of a negative output gap, a situation that can keep inflation expectations at low levels for a longer period of time," the bank's statement said. (Reporting by Helen Murphy, Jack Kimball, Nelson Bocanegra, Carlos Vargas, Monica Garcia and Luis Jaime Acosta; Editing by Andrew Hay)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.