Colombia May Keep 4.5% Rate to Gauge Effect of Europe Crisis

Colombia’s policy makers will probably leave borrowing costs unchanged for a second straight month and end a dollar-purchase program as slowing inflation gives them leeway to gauge the impact of the European debt crisis on global growth.

The seven member board, led by bank chief Jose Dario Uribe, will keep the overnight rate at 4.50 percent today. 

The meeting is scheduled to start at 3 p.m. New York time.

Policy makers voted unanimously last month to leave the key lending rate unchanged for the first time in seven months, noting uncertainty about the “size and duration” of a worldwide slowdown, according to minutes of the meeting published Sept. 2. 

Brazil last month followed Turkey in lowering interest rates as policy makers seek to shield their economy from the European debt crisis.

The central bank “will take a wait and see approach.”

In addition to voting to pause again, Banco de la Republica probably won’t extend plans to buy a minimum of $20 million daily after a rout in global markets wiped out the peso’s gains this year, according to Camilo Perez, head analyst at Banco de Bogota SA, Colombia’s second biggest bank.

Currency “intervention isn’t needed at these levels,” said Perez. 

“What is the general driver in markets now is risk aversion and that means a weaker peso.”

Rate Horizon, Growth

Colombian President Juan Manuel Santos, who asked the central bank to refrain from raising rates further after consumer prices unexpectedly fell in August, met with business representatives this week to discuss measures to guard the $288 billion economy from a possible global recession.

Still, a majority of Colombian analysts forecast policy makers will raise their key rate by 50 basis points to 5 percent by year end, according to a central bank survey published Sept. 13. 

None of the 38 economists surveyed expect a rate cut this year.

Latin America’s fifth-largest economy is expanding at a “good” pace amid strong domestic demand and increased lending, the central bankers noted in a statement accompanying last month’s decision. 

In July, they raised their forecast for Colombia’s growth this year to as high as 6.5 percent.

‘Demand Remains Strong’

Gross domestic product rose 5.2 percent in the second quarter from a year earlier, according to a Sept. 22 government report, the second fastest pace in three years.

Retail sales surged 11.8 percent in July, for a 15th straight month of double-digit growth. 

That’s its longest run in a decade.

Annual inflation quickened to 3.42 percent in July, the fastest since June 2009, before slowing to 3.27 percent in August. 

The central bank targets inflation of 2 percent to 4 percent this year.

“Leading indicators including bank lending and retail sales show demand remains strong,” said Francisco Chaves, an analyst at Bogota based brokerage Corredores Asociados SA, who forecasts the key rate will be raised to 5 percent by year-end. 

If you continue with an expansive rate under these conditions, you risk fueling inflation.”

Reassurance, Equilibrium

While the peso’s 9 percent decline against the dollar since mid-July may prompt the bank to halt its dollar-purchase program, Juan Camilo Santana, an analyst at Cia. de Profesionales de Bolsa SA, predicts the central bank will extend the purchases through January.

“Investment flows will eventually return when the external environment calms down and that will again pressure gains in the peso,” said Santana. 

“The purchases give exporters reassurance.”

The peso fell 0.8 percent to 1,932.20 per U.S. dollar at 9:21 a.m. New York time, from 1,917.65 yesterday. 

In the year to date, it has weakened 1.3 percent, the ninth-best performance against the dollar among 25 emerging market.

Finance Minister Juan Carlos Echeverry has indicated a peso about 1,900 is near its equilibrium level.

The central bank, which first announced its plan for the daily dollar purchases in March 2.010, had said they would run until at least today as it sought to ease gains in the local currency.

In a Sept. 24 interview, Uribe declined to say whether the program would be extended when policy makers meet today.