Colombia cuts rates in surprise move as economy slows

BOGOTA Sat Nov 24, 2012 12:55am GMT

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BOGOTA (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 three of 29 economists expected the bank to cut its rate. The rest expected the overnight lending rate to remain 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, he said.

Colombian President Juan Manuel Santos, whose finance minister is on the board, said that four members voted in favour of a cut and three against. The exact count of the vote is rarely published, and even the minutes do not give the breakdown of votes.

"I congratulate (Finance Minister Mauricio Cardenas) because you won the vote today 4-3 to lower the central bank interest rate...I believe it should help to stimulate the economy more," Santos said in the coastal city of Cartagena.

The government has been under pressure from industrialists and exporters to slash the rate given the weakening of some key economic indicators such as retail sales and industrial production and that a strong peso currency is hurting exporters' profits.

The shrinking industrial production has set off alarms that weak overseas demand for Colombia's manufactured goods may put pressure on factories just as the jobless rate is falling.

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 bonds maturing in July 2024 fell after the rate decision, closing down 13 basis points to 6.02 percent from 6.15 on Thursday.

Cardenas on Wednesday called the industrial sector "stagnant" and indicated he would support lower borrowing costs to spur expansion.

INFLATION CONTROLLED

Retail sales had a modest 2.3 percent growth in September, well off last year's 8.1 percent rise 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 favourable household confidence will likely sustain a recovery in consumer growth," the central bank's 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 December 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 pummelled 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 labour and production costs in pesos and made them less competitive abroad.

(Reporting by Helen Murphy, Nelson Bocanegra, Jack Kimball, Monica Garcia and Carlos Vargas; Editing by Andrew Hay and Lisa Shumaker)

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