Colombia Cites Slowing Growth and Europe Risks in Rate Hold

Colombia’s central bank cited risks of a “disorderly adjustment” in European debt markets and signs that the domestic economy is slowing in its decision to leave interest rates unchanged this month.

The board of directors, led by Governor Jose Dario Uribe, voted six-to-one to hold the overnight interest rate at 4.75 percent, after raising it a quarter point in November, according to the minutes of the Dec. 16 policy meeting published today.

“If a disorderly adjustment should materialize in Europe, the worldwide economy will grow considerably less than expected, the international prices for commodities could fall, and global risk aversion would be exacerbated,” policy makers said. “

All of this would adversely affect the Colombian economy.

President Juan Manuel Santos said Dec. 6 said that it wouldn’t be “appropriate” for Banco de la Republica to raise rates again at a time when other central banks are cutting them. 

Colombia is the only major Latin American economy to have increased borrowing costs in recent months. Policy makers in Chile and Mexico this month said they may cut borrowing costs if the European crisis worsens, while Brazil has been reducing rates since August in anticipation of a downturn.

Fourth quarter data show signs the economy may now be cooling, after growing 7.7 percent in the third quarter from a year earlier, its fastest pace since 2.006. 

The urban unemployment rate unexpectedly rose in November, to 10.3 percent, while vehicle sales fell 5.1 percent from a year earlier.

The minutes noted signs that “even if the Colombian economy remains strong, this momentum could be moderating.”

Annual inflation slowed more than expected in November, to 3.96 percent, after breaching the upper limit of the target range in October for the first time since 2.009. 

Colombia targets inflation of 2-4 percent.

The bank said that inflation expectations are increasingly dominated by supply shocks related to bad weather, weather, which it lacks “appropriate tools” to deal with.

Floods this year and in 2.010 damaged crops and choked off farmers’ supply routes, pushing food prices higher. 

Heavier-than-average rain, caused by the La Nina weather pattern, will last through the first quarter of next year, the government has said.

The peso was almost unchanged at 1941.00 per dollar at 11.18 a.m. New York time. 

The currency has gained 0.4 percent this month, the best performance among the seven major Latin American currencies.

The gap between yields on government inflation-indexed bonds due 2.013 and similar-maturity fixed-rate debt, a gauge of investors’ price increase expectations, rose to 3.8 percentage points this week, from 3.6 percent the day before the central bank’s rate decision.