Finance & Business World

Colombia’s central bank will probably keep its benchmark rate unchanged today after seven straight reductions as inflation slows and the economy shows signs of a recovery.

The seven-member board, led by bank chief Jose Dario Uribe, will maintain the interbank rate at 4.5 percent, according to 20 of 22 economists surveyed by Bloomberg. Two analysts forecast a half-point cut.

“We’re starting to see the impact of lower interest rates,” said German Verdugo, head analyst at Bogota-based brokerage Correval SA. “If they lowered the rate more, they would be risking too much inflation. We’re seeing recovery in consumer and corporate confidence.”

Colombia’s economy will probably shrink for a third consecutive quarter in the three months through June, Uribe said July 10, the longest contraction since 1999, before resuming its expansion. Policy makers have room to pause for the “near future,” the bank chief said last month.

Consumer prices fell in June for the first time since September, putting the annual inflation rate at 3.8 percent, below the bank’s 4.5 percent-to-5.5 percent target, and less than half the 7.9 percent pace reached in October 2008.

“Lower rates could promote additional growth, but this is a pretty potent stimulus at 4.5 percent, and they need to be in a position to cap inflation when the economy rebounds,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York.

Economic Outlook

The government maintained its official economic growth forecast for 2009 at 0.5 percent to 1.5 percent even after the economy entered recession with a 0.6 percent contraction in the first quarter compared with the same quarter a year earlier.

Policy makers last year pushed borrowing costs up to a seven-year high, leading to lower consumer lending, industrial output and retail sales. Before beginning to cut rates in December, the bank’s seven-member board increased them 16 times over 2 1/2 years to curb inflation.

Retail sales fell 3.5 percent in May from a year earlier, while industrial output declined 6.5 percent in May from a year earlier, the national statistics agency said last week.

Uribe and Finance Minister Oscar Ivan Zuluaga have said the country isn’t in a recession since Colombia’s gross domestic product expanded 0 best life insurance company.2 percent in the first quarter of 2009 compared with the fourth quarter of 2008.

Second-Half Rebound

The bank chief has said policy makers expect the economy to revive in the second half of 2009 and end the year with slightly positive growth. The government estimates 2010 gross domestic product growth of 2.5 percent, Zuluaga said June 16.

In announcing the board’s decision to trim the overnight rate to the lowest in at least a decade on June 19, Uribe told reporters that “we don’t expect changes to the benchmark rate in the near future.”

Policy makers at last month’s meeting agreed that “with the data at hand, no further changes in that rate are anticipated in the near future,” according to the minutes posted on the central bank’s Web site.

The bank board may also prefer to hold the rate at 4.5 percent through year-end rather than ease further in 2009 only to be forced to raise borrowing costs in 2010, a presidential election year, said Alberto Bernal, head of emerging markets research at Bulltick Securities Corp.

“Economic activity has touched bottom and headline inflation is falling much faster than core inflation,” Bernal said. “Also, 2010 is an election year so the central bank will likely try to avoid having to raise rates.”

Prioritizing Inflation

Zuluaga, who is also president of the bank’s board, hopes as much as 55 trillion pesos ($27.9 billion) of infrastructure spending this year will also provide a boost to the economy and create as many as 800,000 jobs.

Colombia expects a budget deficit next year equivalent to 3.4 percent of gross domestic product compared with a forecast shortfall this year of 2.4 percent, Zuluaga said in June.

The current account had a deficit of $976 million in the first quarter of 2009, according to the central bank.

“Since Colombia is running twin deficits, current account and fiscal, they need to keep rates here to ensure funds keep flowing in,” Duarte said.

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