*COLOMBIA CENTRAL BANK LOWERS LENDING RATE TO 4.00% VS 4.50%

By Helen Murphy and Alexander Cuadros
Sept. 25 (Bloomberg) -- Colombia’s central bank
unexpectedly cut its benchmark interest rate for the first time
in three months as policy makers seek to boost the economy as
inflation remains below target.
The seven-member board, led by bank chief Jose Dario Uribe,
reduced the interbank rate to 4.00 percent today, surprising all
27 economists surveyed by Bloomberg.
South America’s fourth-largest economy went into a
recession for the first time since 1998 when gross domestic
product fell 1.1 percent in the last three months of 2008,
followed by contractions in the first two quarters of 2009.
Uribe had anticipated that seven straight rate cuts before
July’s pause would bolster consumer demand, underpinning a
second-half rebound in growth.
“The bank is reacting to the fact that the economy isn’t
growing as well as one would expect,” said Alberto Bernal, head
of emerging markets research at Bulltick Securities Corp. “We
all want the economy to grow more but the current level of
interest rates is very expansionary.”
The central bank missed its inflation target for the past
two years as consumer spending created the strongest growth in
three decades during 2007. That helped push inflation to as high
as 7.9 percent last year. Policy makers have always said
controlling inflation is the bank’s priority.
“The economy remains weak at this point,” said David
Duarte, a Latin America analyst at 4Cast Inc. in New York. “But
the bank has been conservative on rates because they want to
remain ahead of the inflation curve.”

Economy, Trade

Sixteen interest rate increases leading up to last December
helped relieve inflationary pressure, bringing the annual rate
down to 3.1 percent last month. That puts it in line to end the
year below the bank’s 2009 target of 4.5 percent to 5.5 percent
and near its so-called long-term target of 3 percent.
A central bank survey of 36 economists forecast year-end
inflation of 3.3 percent this year and 4.4 percent for 2010.
“There are strong green shoots in the global economy and
this is also true in Colombia,” said Rafael de la Fuente, chief
Latin America economist at BNP Paribas SA in New York.
Still, any growth in the economy may be tempered by a
diplomatic spat with Venezuela, he said.
Venezuelan President Hugo Chavez in July said he would
freeze relations with Colombia and find alternatives to imports
after Colombian President Alvaro Uribe announced a plan to allow
U.S. troops to use military bases for anti- drug operations.
Chavez yesterday said trade between the two nations will be
reduced to “zero.”
“I suspect if we do get the type of trade war Venezuela’s
hinting at, it would be hard for Colombia not to be hit on the
export side,” said de la Fuente.

‘Low’ Rates

Colombian cargo planes have already been barred from
entering Venezuela and Chavez has sought to substitute Colombian
food and car imports with purchases from Argentina. Venezuela is
Colombia’s second-biggest export market, with the two trading
about $7 billion last year.
“The trade risks to Colombia posed by Venezuela and
Ecuador are growing,” said some bank directors last month after
calling for a rate cut, according to minutes of the meeting.
Still, the majority of board members argued that the
current monetary stance is expansionary. They agreed that there
is no need for “abnormally low” rates given Colombia hasn’t
suffered a financial crisis that justifies “extreme policy
measures.”
Bank chief Uribe said Sept. 23 that rates should remain
stable as “long as possible” if the economy allows.
The government reported yesterday that second-quarter GDP
contracted 0.5 percent, following revised declines of 0.4
percent and 1.1 percent in the two prior quarters. Economists
expected a 0.6 percent decline, according to the median of 22
forecasts compiled by Bloomberg.

Growth Outlook

Bank chief Uribe forecasts zero growth this year and an
expansion of 2 percent to 3 percent next year. The Finance
Ministry forecasts 2009 growth at 0.5 percent to 1.5 percent.
Policy makers have said they would continue to monitor the
peso, which has gained 17 percent in 2009. The peso strengthened
0.2 percent to close at 1924.45 per dollar.
The yield on Colombia’s 11 percent bonds due in July 2020
fell to 9.130 percent from 9.148 percent yesterday, according to
the stock exchange. The yield has declined 1.57 percentage
points from 10.70 percent since Dec. 30, 2008, according to
Colombia’s stock exchange

By BillBigD on Sep 25, 2009, 12:20 in Friendly Talkzone.

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