Colombia Central Bank Cuts Overnight Rate for Fifth Month to 6%

Colombia’s central bank cut its benchmark interest rate for a fifth straight month today in an effort to ward off an extended recession.

Policy makers led by central bank chief Jose Dario Uribe reduced the interbank rate by a full point to 6 percent, matching 23 of 30 forecasts in a Bloomberg survey of economists. The other analysts forecast cuts of 0.5 point to 1.5 points.

After shrinking for the first time since 1999 in final quarter of 2008, Latin America’s fifth-biggest economy is likely to enter recession in the first quarter. Annual inflation has slowed for five consecutive months since reaching the fastest pace since 2001, giving policy makers leeway to continue the country’s longest rate-cutting cycle in over six years.

“There has been a much bigger contraction in the economy than they thought,” said Mario Nigrinis, an economist at BBVA Colombia. “The balance of risks is now firmly focused on the economy more than inflation. Still, it’s the drop in inflation expectations that’s allowing these interest rate cuts.”

Policy makers, who have made battling inflation their priority, last month said the economy is weakening faster than they anticipated.

Sixteen interest rate increases in 28 months pushed the overnight rate to 10 percent last year, a level that discouraged borrowing, curbed consumer spending and slowed inflation after two years of growth above 5 percent. The bank missed its annual inflation target two years in a row.

‘Cut Now’

“I would like them to do more, say 2 points,” said economist Alberto Ramos at Goldman Sachs in New York who expects the economy to shrink as much as 1 percent this year. “If they want people to take on credit and start spending, then cut now. All they have is monetary policy, so they should use it well.”

Colombia’s economy flourished from a decline in violence related to drug-funded rebels brought about by President Alvaro Uribe, who took office in 2002.

In his first full year as president, the economy grew 4.6 percent, its best performance in eight years, and accelerated to 7.5 percent in 2007, its fastest pace in three decades.

That growth has slowed as the global economic crisis chokes bank lending and saps consumer confidence. Colombian industrial production has declined for seven straight months while retail sales have fallen for six months.

The government has revised down its 2009 gross domestic product growth estimate to a range of 0.5 percent-to-1.5 percent from a previous forecast of 3 percent.

“The contraction is intensifying and there’s nothing out there that points to things steadying,” said Ramos.

Credit Line

To offset the effects of the global financial crisis and bolster Colombia’s foreign-exchange reserves, the government on April 20 announced it was requesting a credit line of about $10.4 billion from the International Monetary Fund.

Since April 20, the peso has gained almost 4 percent against the dollar, to trade near a two-month high.

Colombia’s decision follows similar moves by Mexico and Poland to consider aid from the IMF, the Washington-based lender with 185 member nations. Peruvian Finance Minister Luis Carranza said the government may seek a credit line as well.

Colombia’s central bank last cut interest rates at five straight meetings in 2001-2002, when policy makers sought to avert a recession and cut a double-digit unemployment rate.

Finance Minister Oscar Ivan Zuluaga, who also is president of the seven-member bank board, has said Colombia is in a better position to fight an economic slump than in 1999, when a banking crisis shuttered lenders and led Colombia’s government to nationalize several banks.

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Central bank chief Uribe on March 29 said the economy likely will contract for a second straight quarter in the three months through March. Growth in 2009 will be positive, he said.