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Colombia Bank Discussed Need to Bolster Reputation

Colombia Bank Discussed Need to Bolster Reputation (Update1)

By Helen Murphy

June 6 (Bloomberg) -- Colombia's central bank board at its last meeting discussed the need to ``bolster'' its reputation for being committed to fighting inflation as food and oil prices push the rate above its annual target.

Colombian President Alvaro Uribe urged policy makers to cut the benchmark lending rate before the bank's May 23 meeting because the country's economy appears to be slowing. The bank kept the rate at 9.75 percent as policy makers weighed the risk of slower growth with accelerating inflation.

``Some Board members emphasized that inflation pressures persist worldwide and, given the forecasts for inflation in the coming months, inflation and expectations of inflation should be anchored in the targets,'' according to minutes of policy makers' discussions at the last meeting, sent today by e-mail.

Annual inflation accelerated to 6.39 percent in May from 5.73 percent in April. The bank targets inflation of 3.5 percent to 4.5 percent.

Uribe also said May 21 that lowering the benchmark lending rate would help stem gains in the peso, which has climbed 19 percent this year, hurting exporters.

In a bid to tame inflation, the central bank has raised interest rates from 6 percent in April 2006. The increases have made peso-denominated assets more attractive, relatively, and raised demand for the currency.

Finance Minister Oscar Ivan Zuluaga, who is president of the bank's board, also has voiced concern that the difference between interest rates in Colombia and the U.S. is attracting investment and further strengthening the currency. Some of the bank's board members pointed to other reasons for the strong currency.

Peso's Strength

``Appreciation of the peso is basically due to strong global pressure for dollar devaluation and to the trend in terms of trade and foreign direct investment,'' the bank's minutes said.

Zuluaga said June 3 that a stronger peso would be ``catastrophic'' for the economy and the government is ready to take measures to stem gains in the currency.

The peso strengthened 0.3 percent to 1702.85 per dollar at 12.44 p.m. New York time, according to the Colombian foreign- exchange electronic transactions system, known as SET-FX.

By BillBigD on Jun 7, 2008, 17:56 in Friendly Talkzone.

panthdave says on Jun 8, 2008, 04:13:

There are pro/cons for Colombia on a strong Peso...Personally like I said before I think a strong peso will lift Colombia out of a third world and stand on there own feet without the help from the US in the future and maybe starting paying back to the United States.. Problems are during this period your going to have downfalls which include non commodity exports will go down which they need to get thru..and other issues which Colombia will need to adjust. Now controlling in the future is another issue...which could spiral into disaster. I think Peso needs to be at 1500-1800 at all times..

panthdave Miami

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gimmedub says on Jun 8, 2008, 06:25:

I can't understand how a high interest rate will reduce inflation.... my take on it is the avg. jorge needs to take a mortgage to buy a house - a high interest rate might keep the price low but that sucker still has to pay the bank the difference...

Also what's with typical colombian business practice - can't sell it at $50mil so I'll raise the price to $75mil???

strong peso or not they also need to cut the taxes all around the board.... how can having a 35%import 10% IVA help any new business venture?

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Ctg Bound says on Jun 8, 2008, 08:24:

gimmedub,

There is less credit in Colombia than developed markets, but rasing interest rate will still help, Colombia was growing to quickly over the last couple of years.

I expect the US problems will have done Colombia good by taking a percentage point or two of the yearly Colombian growth, slowing the economy down to a more sustainable rate, which will then help to keep inflation in check.

Your import tax in incorrect, it varies depending on the product and origin of product, most import taxs are around 20%, but if the product comes from the Andean free trade zone, most products are at zero import tax.

Also IVA is 16% on most products, but that doesn't matter as its cancelled against what you sell, so other than reducing cash flow, has no overall bearing on purchasing the product.

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