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UPDATE 2-Colombia cuts rates in surprise move as economy slows
November 23, 2012 / 8:02 PM / 5 years ago

UPDATE 2-Colombia cuts rates in surprise move as economy slows

* Bank maintains inflation target for 2013

* Global slowdown hitting exports, industry

* Central bank vote was not unanimous (Adds comment, background)

By Helen Murphy and Nelson Bocanegra

BOGOTA, Nov 23 (Reuters) - Colombia unexpectedly cut its key interest rate on Friday to counter a slowdown in Latin America’s fourth-largest economy due to global uncertainty and weaker domestic demand.

Colombia’s central bank cut the lending rate a quarter of a point to 4.50 percent - surprising economists - in a bid to boost 2013 growth amid weakness in the Andean nation’s industrial sector and exports.

In a Reuters survey on Wednesday, only 3 of 29 economists expected the bank to cut its rate, the rest saw the overnight lending rate steady.

Having kept rates on hold the past two months, Colombia joined other Latin American countries such as Brazil that have cut borrowing costs to shield their domestic economies from slack demand overseas

“The weakness of the global economy and the decline in domestic demand has been reflected in lower export growth and a contraction in industrial production,” central bank chief Jose Dario Uribe said after revealing the rate cut.

The decision by the bank’s seven-member board was not unanimous. It was based on an analysis of the degree to which domestic spending could offset a slowdown in growth during the second half of 2012.

A second month of shrinking industrial production set off alarms that weak overseas demand for Colombia’s manufactured goods may put pressure on factories just when Colombia’s jobless rate is falling and a strong currency is hurting exporters.

Industrial output has dropped in five of the last seven months, ending with a 1.3 percent decline in September.

“What has changed in this statement is that they are recognizing that there’s a weakening in the local dynamic. That is what brought about this cut,” said Camilo Perez, an economist at Banco de Bogota.

“They are seeing a bigger slowdown that goes beyond just industry; it’s a general weakening.”

The yield on Colombia’s benchmark Treasury bond maturing in July 2024 fell after the rate decision, clising down 13 basis points to 6.02 percent from 6.15 on Thursday.

Finance Minister Mauricio Cardenas, who represents the government on the central bank board, on Wednesday called the industrial sector “stagnant” and indicated he would support lower borrowing costs to spur expansion.


Retail sales had a modest 2.3 percent growth in September, well off last year’s 8.1 percent but in line with a reduction in household spending after the bank slowed lending earlier in 2012 by raising reserve requirements on consumer credit.

The bank had been concerned households were taking on too much debt.

It expected a gradual recovery in overseas demand for Colombia’s products, stable commodity prices and ample international liquidity to boost economic growth next year.

“The reduction in interest rates, including (Friday‘s), employment stability and favorable household confidence will likely sustain a recovery in consumer growth,” Uribe said.

At the bank’s October meeting, some board members had argued for a rate cut based on controlled inflation and the likelihood of a deceleration in economic growth.

On Friday, the bank set next year’s inflation target at between 2 percent to 4 percent -- the same as this year.

Annual consumer prices in October reached 3.06 percent, lower than 3.08 percent in the previous month. The government will release data for November on Dec. 5.

“This (rate cut) reflects the risks that are beginning to materialize in terms of economic growth and concern about developments on an international level,” said Daniel Velandia, director of economic studies at brokerage Correval in Bogota.

So far the nation has remained largely shielded from global economic troubles that have pummeled major Latin American countries. Colombia’s resilience to shocks was cited by Wall Street agencies when it won back investment grade in 2011.

The bank expressed concern that financial turmoil overseas would continue and likely cause problems for exports.

“The weak world economy and the decline in domestic demand have been reflected in slower growth in our exports and a contraction in industrial production,” Uribe said.

Colombia’s economy grew at a brisk 5.9 percent in 2011 compared with the previous year as improved security conditions brought by a decade-long offensive against armed guerrilla groups attracted a flood of foreign investment.

The central bank earlier this month narrowed its 2012 economic growth forecast, lifting the lower part of the range to 3.7 percent from 3 percent and lowering the top end to 4.9 percent from 5 percent.

Cutting Colombia’s benchmark rate could help slow additional upward pressure on the peso, which has attracted foreign capital due to interest rates near zero in the developed world.

The peso has already appreciated close to 6.5 percent since the start of the year - among the strongest world currencies.

Exporters have called for additional rate cuts in recent months as currency appreciation raised labor and production costs in pesos and made them less competitive abroad. (Reporting by Helen Murphy, Nelson Bocanegra and Jack Kimball; editing by Andrew Hay)

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