Colombia Central Bank Should Hold Interest Rate Steady at 4%, Santos Says

Colombia President Juan Manuel Santos said the central bank risks stifling economic expansion if it doesn’t hold the nation’s benchmark rate at 4 percent.

Santos, who spoke to reporters in Bogota yesterday, said the bank should trust the government to produce strong economic growth with low inflation.

The central bank increased the benchmark lending rate a quarter-point to 4 percent May 30 as bank lending and consumer spending fuels faster-than-expected growth.

“Inflation is a tax on the poor,” said Santos, a former finance minister.

“We ask the central bank to believe in the government’s economic policy and its structural changes that will allow us to grow at fast rates with slow inflation.

“In my calculations, the board should reach 4 percent,” said Santos. “It’s a very respectful request.”

The central bank expects gross domestic product this year to reach close to 5 percent.

JPMorgan Chase & Co. earlier this month raised its 2011 economic growth forecast for Colombia to 4.9 percent, up from 4.5 percent, after the most recent retail sales and industrial production figures beat expectations.

Goldman Sachs Group Inc. this year has raised its forecast to 5.5 percent from 4.6 percent and Morgan Stanley has raised its forecast for growth to 4.9 percent from 4.4 percent.

Finance Minister Juan Carlos Echeverry, president of the bank’s seven-member board, said he would take Santos’s proposal to the next monetary policy meeting scheduled for June 17.

Santos said that Moody’s Investor Service’s decision to raise Colombia’s credit rating to investment grade “confirmed that the economic policy is serious and responsible.”

Moody’s upgraded Colombia today to Baa3, the lowest level of investment grade, from Ba1. The move puts Colombia’s rating on par with Brazil, Peru and Panama. Standard & Poor’s raised Colombia to investment grade two months ago.

‘Difficult Position’

“These comments put the central bank in a difficult position,” wrote Alberto Ramos, an economist with Goldman Sachs Group Inc. in New York, in a research note yesterday.

“If the bank stops the rate hiking cycle in June it could be susceptible to the criticism that the decision was not borne out of straight technical analysis on the balance of risks to growth and inflation outlook but that it was rather a decision to accommodate the wishes of the government,” Ramos wrote.