PBH / colombia (active forums more▼ | travelguide | pictures) / post

Colombia May Keep Rate at 9.5% to Weigh Growth, Inflation Risk

Colombia May Keep Rate at 9.5% to Weigh Growth, Inflation Risk

By Helen Murphy

Feb. 22 (Bloomberg) -- Colombia's central bank will probably keep its benchmark rate unchanged at the highest level since 2001 as board members balance the risks of faster inflation with slowing economic growth and a stronger peso.

The bank, based in Bogota, will maintain the overnight interbank lending rate at 9.50 percent, according to 20 of 32 economists surveyed by Bloomberg. The other 12 analysts expect a quarter-point increase to 9.75 percent.

``There needs to be another hike, but there won't be because the board is too concerned about the economic downturn and the peso,'' said Pedro Tuesta, an economist at 4Cast Inc. in New York, who predicts the rate will remain unchanged. ``I'd like to be surprised though.''

The central bank's seven-member board raised lending rates by 2.25 percentage points in the past 15 months and is split over further increases, minutes of the last two meetings show. Some policy makers indicated higher rates may be needed to stem inflation, while others wanted to wait to judge the impact of a global economic downturn on Colombia.

Finance Minister Oscar Ivan Zuluaga, the government's representative on the board, said Feb. 19 that rates shouldn't be raised further. He has voiced concern that the spread between U.S. and Colombian interest rates may stimulate further inflows, strengthening the peso against the dollar and making Colombian exports less competitive overseas.

Credibility

The government has earmarked 300 billion pesos ($158 million) in subsidies to exporters such as textile makers and the agriculture industry to prevent layoffs as the currency strengthens. Colombia's peso has appreciated 54 percent in five years, hurting exports, which account for more than 18 percent of Colombia's $130 billion gross domestic product.

The central bank paused for a second month on Jan. 25 after previous raises to slow lending and cool an economy growing at its fastest pace in three decades. Economic expansion may slow this year to as low as 3.7 percent from as much as 7 percent last year if the U.S. sees no growth. That may prompt a rate cut to bolster consumer spending, central bank director Carlos Gustavo Cano said in an interview Feb. 13.

Economists including Bertrand Delgado, from IDEAglobal Inc., a New York-based research company, say consumer spending and bank lending are still too high to leave rates unchanged.

``If it doesn't raise rates, then it will lose credibility,'' said Delgado, who predicts the bank will set the rate at 9.75 percent. ``Inflation remains elevated and expectations continue to deteriorate. There is the risk of the U.S. economy affecting Colombia, but international food prices remain high, so inflationary pressure persists.''

Higher Spending

Consumer prices rose 1.06 percent in January, more than economists expected, and the annual inflation rate accelerated to 6 percent from 5.69 percent a month earlier. Colombia missed its 3.5 percent to 4.5 percent inflation target.

Colombians have increased their spending since 2002 when President Alvaro Uribe took office and began his battle with drug-funded guerrillas and paramilitaries, making roads safer and increasing Colombians' confidence to purchase cars and property.

The slowing global economy is already taking a toll on demand abroad for Colombian products, Cano said. Sales to the U.S., the destination for 35 percent of exports, are declining, along with purchases by Europe and Venezuela, which make up 20 percent and 15 percent of exports. Exports of textiles, clothing and processed foods are already down, he said.

To contact the reporter on this story: Helen Murphy in Bogota at Hmurphy1 at bloomberg.net

Last Updated: February 22, 2008 00:02 EST