Colombia Central Bank’s Cano Disagreed With Rate Increases

El codirector del Banco de la República, Carlos Cano, anticipa que en la reunión del viernes próximo habrá recorte de medio punto en las tasas overnight y opina (esto es una locura) que la tasa de crecimiento potencial de la economía colombiana es del 6% y que por lo tanto la economía está lejos por debajo del potencial.

 

By Helen Murphy

Dec. 12 (Bloomberg) — Colombian central bank director Carlos Gustavo Cano said he disagreed with the board’s decision to raise interest rates this year as inflation showed signs of slowing and the global economic crisis began to take hold.

Cano, one of seven board members who decide monetary policy, said he had “discussions” with his colleagues over lifting the lending rate in February and July, after maintaining “unanimity” over 14 previous increases beginning April 2006.

“I said let’s wait and see what happens with world inflation, which I thought would begin to decline, and let’s wait to see the effect of the global recession,” Cano said in an interview at his office in Bogota. “I went along with the decision, finally, because it’s the law of the majority.”

Cano, 62, said the board is now in agreement that the next move will be to cut interest rates from a seven-year high of 10 percent. Seven of 11 economists in a Bloomberg survey ahead of next week’s board meeting expect no change in the interest rate.

Since taking office in 2002, Colombian President Alvaro Uribe focused his policies on rooting out drug-funded guerrillas and paramilitaries, which led to a surge in consumer confidence and bank lending, pushing Colombia’s economy to 8 percent growth last year, the fastest pace in three decades.

The increased sense of personal security, investment and consumer spending on big ticket items such as cars and new homes also led to a near doubling of the annual inflation rate in less than three years to 7.94 percent in October.

Policy Delay

Now, as the first simultaneous recession since World War II in the U.S., Europe and Japan looms over Colombia, and consumer confidence begins to wane, inflation at 7.73 percent in November remains almost twice the bank’s target pace for this year.

Still, expectations for inflation over the next 12 months fell to 5.36 percent in the central bank’s December survey of economists, from 5.84 percent in the November reading.

Cano said the board has done what it set out to do, slow inflation and reduce the “euphoria” that supported high consumer spending.

“You have to take into consideration that in monetary policy there is a delay of 18 to 24 months,” he said.

The annual pace in local bank lending has halved to 18 percent since its peak in March 2007, Cano said. Consumer lending has also dropped from annual growth rate of 50 percent to 14 percent.

After reaching a seven-year high in October, inflation did decelerate last month, and Cano expects the bank will be able to meet its 2009 year-end target for consumer prices.

‘No Doubt’

“I have absolutely no doubt we will meet the target” of 4.5 percent to 5.5 percent, said Cano. “It’s time to start to normalize policy and reduce rates to compensate and help prepare the internal market against what’s to come. Next year will be a year of much lower growth.”

At the past two board meetings, at least some board members called for a cut in interest rates of as much as a half point as the economy slows more than expected.

Cano, who declined to say how he voted at the meetings, said growth will slow this year to about 3.5 percent and next year to as low as 2 percent.

“Growth is very low compared to the potential,” said Cano who believes sustainable growth without inflation should be as much as 6 percent annually.

Gross domestic product expanded 3.7 percent in the second quarter, the slowest pace since 2003, and down from 8.4 percent in the same period a year ago.

As the global economic slowdown spreads, Cano said Colombian banks are well consolidated, capitalized, administered, have strong earnings and little exposure to foreign debt, putting them in a good position to weather the crisis.

Indicators

Still, industrial production, retail sales and construction are all falling, he said.

The economic slowdown will effect Colombia in terms of its exports to Venezuela and Ecuador, which accounted for almost a fifth of the country’s exports in 2007, as the price of commodities like oil drop, said Cano.

The composition of the country’s exports is a concern as many of the country’s goods sold overseas are labor intensive, like processed foods, textiles and shoes to Venezuela, said Cano, which may impact employment in Colombia.

The Colombia’s peso appreciated almost 80 percent between late January 2003 and mid-June this year, hurting exports, which account for almost a fifth of Colombia’s $172 billion economy.

The peso was little changed at 2,268.95 per dollar at 11:16 a.m. New York time, from 2,270.50 yesterday, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX.

Unemployment has started to rise, reaching 11 percent in October, up from 10.2 percent a year earlier and salaried, professional jobs with social security are being lost, said Cano.

“In the past months unemployment has started to climb,” said Cano. “But what worries me more is the composition of the job losses. The jobs that are being destroyed are salaried jobs.”

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