December 16, 2016 / 7:55 PM / 7 months ago

UPDATE 1-Colombia central bank cuts interest rate to 7.5 pct

3 Min Read

(Adds bank comment, detail on growth, inflation)

By Helen Murphy and Julia Symmes Cobb

BOGOTA, Dec 16 (Reuters) - Colombia's central bank unexpectedly cut the benchmark interest rate to 7.5 percent on Friday as policymakers determined that weak economic growth was a more pressing risk for the Andean country than inflation that was still high.

In a split decision, the seven-member board decided to reduce the lending rate by 25 basis points - the first reduction in almost four years - surprising all analysts in a Reuters survey this week.

Four members voted to put the economy's growth at the forefront of policy as inflation shows signs of heading down toward the bank's target range of 2-4 percent. Most analysts had expected the first cut to come during the first quarter, perhaps as soon as January.

Last month there were signs policymakers wanted a reduction sooner, following data that showed the economy grew 1.2 percent annually in the third quarter, less than the 1.5 percent expected by the market.

Economic growth has slowed amid a slump in the price of crude oil, one of Colombia's leading exports.

"Domestic demand fell ... due to lower investment and slowing consumption. These results and the new economic activity figures for the fourth quarter suggest that throughout 2016 economic growth could be slightly below 2 percent," the bank said in its statement.

After a lengthy period in which the bank has battled inflation, there are signs that consumer prices are heading lower toward the target range. Bank chief Jose Dario Uribe said recently inflation will come within the range by the end of next year.

"Inflation continues to decline faster than anticipated ... The effects of several supply shocks that have affected inflation and its expectations continue to reverse and this trend is likely to continue," the bank said.

Inflation hit nearly 9 percent in July but has receded now that a prolonged drought has eased and a truckers strike has ended, the bank has said. Inflation reached 5.96 percent for the 12 months ending in November, still well above target.

Some economists question how a tax reform being tackled in Congress could impact inflation and the bank's future decisions.

"The structural reform proposal submitted by the government to Congress is a key action that contributes to long-term growth by strengthening fiscal sustainability, fostering macroeconomic stability and preserving credit ratings," the bank said.

This was the final board meeting in which Uribe voted, as his 12-year tenure as chief ends. He will be replaced by Juan Jose Echavarria. (Reporting by Helen Murphy, Julia Symmes Cobb, Nelson Bocanegra, Luis Jaime Acosta Carlos Vargas and Monica Garcia; Editing by Chizu Nomiyama)

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