Colombia Surprises Analysts With First Rate Cut Since 2.010

Colombia cut interest rates for the first time since 2.010 after policy makers were surprised by the economy’s loss of momentum amid Europe’s debt crisis.

The seven-member board, led by bank chief Jose Dario Uribe, voted to cut the overnight lending rate by a quarter point to 5 percent, matching the forecast. 

Twenty-four analysts had expected policy makers to hold the rate at 5.25 percent. Uribe said all directors had voted for a rate reduction though some board members wanted a bigger cut.

“The economy is decelerating, and all the leading indicators show signs of cooling down, while the inflation risk is really benevolent,” Camila Estrada, the chief analyst at Bogota-based Helm Bank SA, said in a telephone interview. “

Meanwhile, external risks still pose a threat.”

Banco de la República last year flouted a global trend for lower interest rates in order to prevent “excessive” consumer credit growth from overheating the economy. 

Now, with industry contracting, and a slowing world economy curbing demand for the Andean nation’s oil, coal and agricultural goods, policy makers are reversing course.

The European Central Bank, People’s Bank of China and South Africa’s central bank have all cut borrowing costs this month, while policy makers in Brazil on July 11 reduced their key rate for an eighth straight meeting to a record 8 percent.

“The weakening of the global economy is restricting the growth of the Colombian economy through lower external demand and lower international prices of major export products,” policy makers said in their statement posted on the bank’s website. “

These factors are likely to continue operating in that direction the next few quarters.”

The bank today lowered its 2.012 economic growth forecast to a range of 3 percent to 5 percent, down from a previous forecast of 4 percent to 6 percent, and said that growth in 2.013 should be similar.

“This is a clear and strong signal of the change in posture of monetary policy,” Uribe said today.

Andres Langebaek, senior economist at Banco Davivienda SA, who correctly predicted today’s cut, forecasts that the bank will cut rates a further 0.75 percentage point by year-end.

Industrial output fell for a third straight month in May from a year earlier, while year-on-year export growth slowed to 1.2 percent, from 4 percent in April and 16.1 percent in March.

In addition to slowing overseas demand, Colombian exporters also have to contend with the world’s biggest currency rally. 

The peso has strengthened 8.2 percent to 1791.56 per U.S. dollar this year.

Uribe today said that while consumer credit remains high, its overall pace has slowed.

Credit expanded 18.3 percent in May from a year earlier, down from year-on-year growth of 22.4 percent in December.

The yield on Colombia’s benchmark 10 percent peso- denominated bond due in July 2.024 rose two basis points to 6.77 percent, according to the central bank.

The central bank was surprised by the weakness of exports and industrial output, Uribe said in a July 12 radio interview.

More than $950 billion has been wiped off world stock markets since July 19 as yields on Spanish government securities climbed to euro-era highs amid speculation the nation will need a bailout to backstop its regions and banks.

Colombia’s annual inflation slowed to 3.20 percent in June, lower than the 3.32 percent median forecast of 24 analysts surveyed by Bloomberg and down from 3.73 percent at the start of the year.

The rate is the lowest after Chile of 10 Latin American economies tracked by Bloomberg. Colombia targets inflation of 3 percent, plus or minus one percentage point.

The gap between yields on government inflation-indexed bonds due 2.013 and similar-maturity fixed-rate debt, a gauge of bond traders’ inflation expectations known as the breakeven rate, fell to 2.16 percentage points today from 3.8 percent at the start of the year.

Oil exports rose 70 percent to $28 billion dollars last year, while exports of coal rose 40 percent to $8.4 billion. 

Oil accounted for 49 percent of the country’s sales abroad last year. 

The price of crude has slumped 9 percent this year.