latinindustry

Colombia cuts, should investors shudder?

It was a long meeting. But it was bound to happen. Colombia’s Banco de la República, the Andean country’s central bank, decided to cut the overnight lending rate by 25 basis points to 5 per cent.

“This is a clear and strong signal of the change in posture of monetary policy,” the bank’s chief, José Darío Uribe, said Friday, pointing at the start of an easing cycle. This was the first trim since 2010.

Leaving aside the bank’s spotless track record of independence, it is unclear if Uribe yielded to political pressures, something that have been on the rise in recent months. “The bank is independent, yes, but it cannot be autistic,” Jorge Restrepo, an economist with the Javeriana University in Bogotá tells beyondbrics.

But he definitely yielded to market ones. Since last year, the bank has been flouting a global trend for lower interest rates in order to hold excessive consumer credit growth from overheating the economy. Last week Uribe said the weakness of Colombia’s exports and industry had surprised policy makers. So now he and some of his peers, decided to change course.

“In some emerging economies, for example, Brazil, China, and South Korea, the central banks have recently reduced their interest rates, as a way of reversing the slowdown in demand,” the bank’s board said in a statement.

The Andean country’s economy grew by almost 6 per cent last year. But that growth had already slowed in the first quarter to 4.7 per cent. So the bank’s board also voted to cut their economic growth forecast to 3 to 5 per cent from a previous forecast of 4 per cent to 6 per cent. According to them, the macroeconomic trend was going to “continue operating in that direction for the next few quarters.” They also said that growth in 2013 should go down a similar road.

Colombia’s foreign investment grew to $9.3bn in the six months to June. The flipside is that, alongside the domestic credit boom, this FDI flow has been pumping a Brazilian-like appreciation of the Colombian peso. The currency had risen almost 9 per cent against the dollar, since the start of this year alone.

This has prompted pockets of hostility from non-commodity based domestic exporters, such as banana and flower producers, which have begged the bank to come to their aid after previous rate hikes. The government has also been pressured to take action on the currency. So the government has been pressuring the bank.

It seems now Colombia has decided to follow on its big brother footsteps, as Brazil recently cut rates as well. Let’s hope its economic growth will not follow Brazil as well.

Related reading:
Colombia: hitting a brick wall?, beyondbrics
Colombia: time to get tough on peso, beyondbrics
LatAm rates: playing wait and see, beyondbrics