Colombia Central Bank May Keep Rate at 10% as Economy Slows

By Helen Murphy

Aug. 15 (Bloomberg) -- Colombia's central bank will probably keep borrowing costs unchanged as policy makers bet a slowing economy and 16 interest rate increases in the past 28 months are enough to stem inflation.

The Bogota-based bank will hold the interbank rate at a seven-year high of 10 percent, according to 32 of 36 economists surveyed by Bloomberg. The other four economists expect the rate to increase a quarter point to 10.25 percent.

Colombian economic growth slowed to 4.1 percent in the first quarter from 9.1 percent a year ago, sparking criticism from President Alvaro Uribe that monetary policy is too harsh. Easing commodity prices, the biggest driver of inflation in Colombia, will lower pressure on policy makers to raise rates further.

``Economic growth is moderating, international food and fuel prices are coming down, and Colombia's central bank is definitely not behind the tightening curve,'' said Alexandre Lintz, an economist at BNP Paribas in Sao Paulo. ``It has already done what's needed to bring inflation down.''

Policy makers have missed their inflation target for two years and are unlikely to meet their 3.5 percent to 4.5 percent range for 2008. Annual inflation quickened to 7.52 percent in July, the highest since May 2003, and may accelerate in August after a two-week strike by truckers halted deliveries and drove the prices of fruits and vegetables higher.

Increasing Criticism

Policy makers have increased the rate from 7.5 percent at the start of 2007 and bank chief Jose Dario Uribe is coming under increasing criticism from government officials. Colombia's President Uribe says high rates hurt economic growth and strengthen the peso, curbing demand for Colombian exports and forcing companies to fire workers.

``The last increase was enough to calm inflation expectations,'' said Liliana Rojas, an economist at Bogota- based Vision de Valores SA. ``The decision to raise rates was the best decision the board could have made and so to increase further now would have the opposite effect and scare the market into thinking inflation is going to worsen.''

The central bank counters it needs to anchor inflation expectations and boost its credibility. Still, minutes of the bank's July 25 meeting show policy makers discussed the ``dilemma'' of bolstering economic growth and stemming inflation over the long term.

``Inflation expectations are the biggest concern for the bank right now, but economic activity is slowing more than expected and will continue to slow,'' said Camilo Perez, chief analyst at Banco de Bogota SA.

Presidential Worry

In a bid to slow the Colombian currency's 54 percent rally over the past five years, the central bank in June said it would make daily purchases of up to $20 million a day in the currency market.

President Uribe has used his six years in office to battle drug-funded paramilitary and guerrilla fighters, making Colombia's roads safer and encouraging consumers to increase borrowing to buy cars and new homes.

That helped raise economic growth to its fastest in three decades and stoked inflation.

The bank's policy of raising interest rates and pushing up costs for the purchase of big-ticket items has sparked almost monthly criticism from government officials.

``I cannot deny I am worried,'' President Uribe said in comments published on the presidential Web site Aug. 6. ``I am afraid that high interest rates are crimping consumption. People don't want to buy houses anymore because they are afraid of interest rates.''

Central bank chief Uribe defended last month's decision to raise rates saying inflation is still the biggest threat to Colombians' disposable income.

``The question we are getting from various clients now is when will the bank start to lower rates and I believe that maybe we are getting ahead of ourselves with that,'' said Boris Segura, an economist at Morgan Stanley in New York. ``I think that at least from now until the second quarter of next year the central bank won't be cutting rates.''

To contact the reporters on this story: Helen Murphy in Bogota at Hmurphy1@bloomberg.net.