Colombia Cuts Rate To 4.75% And Steps Up Dollar Purchases

Colombia reduced borrowing costs for a second straight month after inflation slowed to the target rate, while also announcing that the central bank will buy $700 million by the end of September to help stem a rally by the country’s currency.

The seven-member board, led by bank chief Jose Dario Uribe, voted to cut the overnight lending rate by a quarter point to 4.75 percent, as forecast by 29 of 33 analysts.

The others had expected rates to be left unchanged. Uribe said that the decision was unanimous.

Today’s meeting was the last for outgoing Finance Minister Juan Carlos Echeverry, who resigned yesterday citing personal reasons. 

“According to the evaluation of risks, the Board considered it appropriate to reduce the interest rate intervention,” policy makers said in their statement posted on the central bank’s website.

The central bank last month cut its key rate for the first time since 2010, and signaled a “change in monetary stance,” arguing in the minutes that slower inflation allows them to maximize “employment and product growth.” 

Inflation slowed to 3.03 percent in July, down from 3.73 percent at the start of the year. 

The central bank targets inflation of 3 percent, plus or minus one percentage point.

“Additionally, in order to provide more permanent liquidity to the economy, the Board decided that, in the remainder of August and September, will buy $700 million through the mechanism of daily auctions of at least $20 million,” policy makers said in their statement.

The peso has rallied 6.8 percent in 2012, the biggest gain of the world’s 31 most-traded currencies tracked by Bloomberg after the Hungarian forint and the Chilean peso, on the strength of sustained foreign investment into the Andean nation’s oil and mining projects.

The increased dollar purchases, combined with purchases of dollars by the Treasury, “has the potential to tame the peso’s rally in the next months,” said Daniel Velandia, the head analyst at Correval SA brokerage in Bogotá.

“It will be on average $8 million more daily than what they were buying,” Velandia said. “It’s a clear step toward more intervention in the market.”

The measure could prevent the peso from appreciating above 1,800 per dollar for the rest of the year, Velandia said. 

The currency weakened 0.3 percent to 1814.55 per dollar today from 1809.35 yesterday.

The Treasury began its own program of foreign currency intervention this month to help Colombian exporters.

‘Fundamental Reason’

The central bank last month cut its forecast for 2012 economic growth to a range of 3 percent to 5 percent, from 4 percent to 6 percent, and predicted expansion of 2 percent to 5 percent next year.

In an interview last week, central bank board member Cesar Vallejo said the “key” determinant of interest rate moves is whether gross domestic product is growing faster or slower than its long-term potential rate. 

Uribe said last month that the economy’s long-term potential growth rate is 4 percent to 5 percent.

The “fundamental reason” for the rate cuts is the global slowdown, said Andres Langebaek, senior economist at Banco Davivienda SA (PFDAVVND), the analyst with the best record of forecasting the central bank’s move.

“There are serious problems for a rapid recovery in the world economy,” Langebaek said in a phone interview before the rate decision. “

In these circumstances our growth could be quite weak in the second half of the year.”

Langebaek forecasts that the central bank will cut the benchmark rate to 4.5 percent at its September meeting, then hold it at that level for the remainder of the year.

Today’s meeting was the last for outgoing Finance Minister Juan Carlos Echeverry, who resigned yesterday citing personal reasons.

He will be replaced by Berkeley-trained economist Mauricio Cardenas, who currently serves as mines and energy minister.

In a radio interview this morning, Echeverry said he would argue for increased dollar purchases at today’s meeting. 

Echeverry said last week that he was “generally not on the winning side” at the bank’s board meetings.