Colombia Bank May Keep Rate on Hold, Resisting Calls for a Cut

By Helen Murphy

Dec. 19 (Bloomberg) -- Colombia’s central bank may keep its benchmark interest rate unchanged for a fifth month, resisting calls for a cut to spur the economy as inflation remains above its target.

Policy makers will hold the interbank rate at a seven-year high of 10 percent, according to 18 of 32 economists surveyed by Bloomberg. Twelve analysts expect the Bogota-based bank to lower the benchmark rate to 9.75 percent today and two analysts forecast a cut to 9.5 percent.

Colombian President Alvaro Uribe and Finance Minister Oscar Ivan Zuluaga have called for lower lending rates, saying it would help the economy cope with the worst global financial crisis since the Great Depression. The seven-member board may instead leave borrowing costs unchanged, betting that a cut would stoke expectations that inflation will accelerate.

“Inflation remains high and hasn’t peaked yet,” said Benito Berber, a strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. “It will be a tough decision.”

Policy makers have said that their next change to the rate, when it comes, will be a cut. In the past two meetings, some board members have lobbied for a reduction of as much as a half point on concern that economic growth may slow further. Bank director Carlos Gustavo Cano said in a Dec. 11 interview that he disagreed with the board’s decision to raise rates this year.

Inflation this year peaked at 7.94 percent in October and eased to 7.73 percent last month, above the central bank’s target range for this year of 3.5 percent to 4.5 percent. Still, inflation expectations over the next 12 months fell to 5.36 percent in the central bank’s December survey of economists, from 5.84 percent last month. The bank targets inflation of no more than 5.5 percent next year.

Simultaneous Recession

As the bank battles inflation, it also must contend with slowing economic expansion. The central bank said growth next year could decelerate to as little as 1 percent, dragged down by the first simultaneous recession since World War II in the U.S., Europe and Japan.

Gross domestic product expanded 3.7 percent in the second quarter, the slowest pace since 2003, down from 8 percent in the same period a year ago. Third-quarter GDP figures will be released Dec. 22.

“The economy will shrink very fast next year, and that will impact employment,” said Bertrand Delgado, an economist with New York-based research firm IDEAglobal. “The board will have a difficult time on this decision, but inflation expectations will continue to decline as the economy decelerates rapidly.”

The central bank board, headed by Jose Dario Uribe and Zuluaga, may wait for Christmas shopping to end before cutting rates, said Rupert Stebbings, head of international sales at Interbolsa SA.

The board may also want to see by how much the minimum wage is increased next year to see how that will impact inflation, Stebbings said.

“There are many variables that lead us to expect the rate to be held another month,” said Stebbings, who expects a half- point cut early in 2009. “They will want to play it safe.”

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