Colombia May Keep Benchmark Rate at 3.5% to Help Fuel Recovery

Colombia’s central bank will probably keep its benchmark interest rate unchanged as policy makers judge the current level will help boost growth without risking inflationary pressure.

The seven-member board, led by bank chief Jose Dario Uribe, will keep the interbank rate at 3.5 percent when it meets today, according to all 28 economists surveyed by Bloomberg. That would be the third straight pause after seven cuts in a year.

Policy makers say the economy is beginning to recover from last year’s recession and consumer demand is improving as a record-low interest rate encourages Colombians to use credit to purchase big-ticket items such as cars and washing machines. An acceleration in inflation caused by dry weather from the El Nino weather effect -- which reduces crop output -- will be short- lived, Uribe has said.

“The economy could do with an additional boost, but the bank isn’t too worried about inflation right now because the dry weather is transitory and it would be a mistake to throw in the towel on reactivating the economy,” said Alberto Bernal, an economist at Bulltick Capital in Miami.

Policy makers estimate that the economy will expand 2 percent to 3 percent this year after little or no growth in 2009. Finance Minister Oscar Ivan Zuluaga, who sits on the central bank’s board, has said the government’s 55 trillion pesos ($28.3 billion) of infrastructure investment last year helped temper Colombia’s first recession in a decade.

Rate, Growth Horizons

Consumer prices rose 2 percent last year, the lowest rate in more than five decades, down from 7.67 percent in 2008, after the bank increased borrowing costs 16 times over 2 1/2 years.

The board may not want to cut rates to stimulate the economy as policy makers anticipate a lower level would lead to a resurgence of inflation, said David Duarte, a Latin America economist at 4Cast Inc. in New York.

The annual inflation rate may almost double by year-end from last year, according to a central bank survey.

“If the speed of the recovery is slower than expected, it’s possible they won’t raise rates until 2011,” Duarte said. “The private sector economy remains anemic. It’s going to need at least another six months of low rates to make sure the recovery is well-rooted and sustainable.”

Retail sales rose 2.7 percent in December, while industrial output climbed 2 percent.

Tensions, Ties

A diplomatic and trade spat between Colombia and Venezuela has led to a plunge in exports and prompted the central bank to consider the decline in trade revenue on the economy as it sets monetary policy, Uribe has said.

Policy makers have also voiced concern that Venezuela’s deepening economic slump may undercut Colombia’s recovery.

Venezuelan President Hugo Chavez, who devalued the bolivar in January, last year pledged to end imports from his Andean neighbor in response to an agreement to allow U.S. armed forces greater access to Colombian military bases.

Exports to Venezuela may fall to $1.5 billion this year as its lingering recession and electricity crisis further suppress demand for Colombian goods, bank chief Uribe has said. That’s down from $6.1 billion in 2008, according to the national statistics agency. Colombia’s exports rose 7.6 percent in December from a year earlier to $3.2 billion.

“Colombian manufacturers and exporters are now scrambling continuously to find new markets, and they’re beginning to find them,” Duarte said.

Trade Partners, Power

Chile, Peru and Central America are helping replace exports to Venezuela, Uribe has said. Colombian companies also are beginning to find domestic buyers for the surpluses created by the drop in trade with Venezuela, Duarte said.

Colombia has offered to sell electricity to Venezuela. Chavez declared a national emergency in the electricity sector on Feb. 8. Water levels may fall below the level needed to run 6,300 megawatts worth of turbines if it doesn’t rain by June.

“Chavez is going to have to eat his words and buy electricity from Colombia,” Bernal said. “If it doesn’t rain by June, it’s all over.”

The peso fell 0.4 percent yesterday to 1942.67 per U.S. dollar. The currency has gained 5.2 percent against the dollar this year, the best performance among 26 emerging-market currencies tracked by Bloomberg.