Colombia's central bank likely to hold rates to bolster growth

Fri Jun 28, 2013 9:29am EDT

* Analysts see rate unchanged amid growth, low inflation

* Colombian currency, bonds weakened over Fed stimulus talk

* Rate unchanged since March after cuts summing 200 bps

By Helen Murphy

BOGOTA, June 28 (Reuters) - Colombia's central bank will likely hold its benchmark interest rate steady for a third straight month on Friday as benign inflation gives policymakers room to keep nourishing the economy's weak manufacturing and export sector.

The seven-member board - headed by Jose Dario Uribe - is expected to maintain borrowing costs at 3.25 percent, according to 24 analysts polled by Reuters earlier this week. Another two predict the bank will opt for further stimulus and cut the rate a quarter point.

Even though policymakers see the economy improving in the coming months, things are still pretty anemic.

Annual growth in the first quarter reached 2.8 percent, missing Finance Minister Mauricio Cardenas' estimate of 3 percent, but meeting the central bank's. For full year 2013, the government has lowered its forecast to 4.5 percent from an earlier 4.8 percent, but most economists polled by Reuters think that is too optimistic.

The government is fighting to boost exports and industrial production, which have dragged down overall growth in the $330 billion economy as factories struggled with a strong peso, which increases labor costs and pits domestically made goods against cheaper imports.

Strong currencies hit exporters the most since salaries, pensions and health benefits are paid in local currency, but overseas buyers pay in devalued dollars.

Cardenas trumpeted industrial output in April as the best in five years, but economists said the growth - reported last week to be 8.4 percent - was not evidence of a recovery, but the result of Easter falling in different months in 2012 and 2013.

Yields on local sovereign bonds have shot up about two percentage points in the last month on expectations the United States will rein in expansionary monetary policy, reducing what has been strong demand for emerging market assets in the last few years.

But that was not enough to tilt analysts' expectations toward a rate cut.

"There are those speculating that the liquidity and bond situation could lead to a cut, but our basic expectation is that they will leave the rates unchanged," said Catalina Tobon, head of economic research at the Skandia financial group.

Colombia has already cut its key lending rate by 200 basis points since mid last year to counter weak international demand for commodity exports and a slowdown in domestic demand. Inflation is at the lower end of the bank's target range of 2 percent to 4 percent and has provided room for the board to continue cutting, according to analysts.

The board likely hopes that maintaining its level of expansion will encourage additional consumer spending as the U.S. economy shows signs of improvement.

EYE ON THE PESO

Colombia has attracted record foreign direct investment in recent years, as a U.S.-backed offensive against Marxist rebels and paramilitaries made the nation a much safer place to do business. While the investment helped bolster the economy, it also pushed the currency higher against the dollar.

Cardenas had made weakening the currency a priority to help manufacturers and exporters, which have struggled for years with a strong peso.

The peso has strengthened steadily over the last decade, with a pause in 2008, from about 2,800 pesos per dollar at the end of 2003 to less than 1,800 at its strongest, prompting heavy lobbying by industrialists.

The peso tumbled last week after Federal Reserve Chairman Ben Bernanke said the Fed's policy-setting committee would likely slow the pace of its stimulative bond purchases in 2013 if the U.S. economy continues to grow.

A heavy dose of verbal and some actual intervention in the foreign exchange market helped weaken the currency before Bernanke made his comments. With the peso currently at 1,923 per dollar, Cardenas has said he has "done his job."

Investors will now be looking for hints on when the bank will dismantle its program of daily dollar purchases aimed at easing gains in the currency.

The central bank has bought millions of dollars daily on the spot market for months to ease gains in the currency, which last year was among the world's strongest, but some board members have raised concerns about the impact of continuing the program for too long.

"We're not expecting a change, since the bank would prefer to maintain its course and have the choice of increasing or decreasing the amount of daily purchases, as it has been doing," said Camilo Perez, head of economic research at Banco de Bogota.

Cesar Vallejo, a board member of Colombia's central bank, told Reuters recently the bank could decide to amend, or even scrap, the program if necessary.

At last month's monetary policy meeting, the board decided to extend the program through September and buy at least $2.5 billion.

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