Colombia Bank Says Venezuela Export Dive Prompted Cut

Dec. 4 (Bloomberg) -- Colombian policy makers said a plunge in exports to Venezuela and below-target inflation supported last month’s decision to cut interest rates in an effort to spur a more “vigorous” rebound.

The seven-member board, led by chief Jose Dario Uribe, unexpectedly cut the interbank rate by a half-point to 3.5 percent at its Nov. 23 meeting. A majority of policy makers voted for the cut while others said it could fuel inflation next year, according to minutes posted on the bank’s Web site.

Most board members said the interest rate reduction “will reinforce economic recovery and reduce the negative effects of the slump in trade with Venezuela,” according to the minutes.

Uribe expects that nine rate cuts in the past year will boost credit and consumer demand, helping pull Latin America’s fifth-biggest economy from its first recession since 1998. Uribe last month said that gross domestic product will be flat in 2009 before expanding next year at the lower end of the bank’s target range of 2 percent to 4 percent.

The peso fell 0.8 percent to a five-week low of 2,007.97 per dollar from 1,992.38 yesterday.

Venezuelan President Hugo Chavez said in July he would end imports from his Andean neighbor because of an agreement to allow the U.S. military access to seven Colombian bases. Until last month, Venezuela was the second-biggest destination for Colombia’s exports, data from Colombia’s customs agency show.

A third-quarter contraction of 4.5 percent in Venezuela’s gross domestic product also reduced demand for Colombian goods, according to the minutes. Policy makers forecast the neighboring country’s economy will shrink 2 percent this year.

Export Plunge

Colombian exports to Venezuela plunged 70 percent in October from a year earlier while total exports fell 5.5 percent, the government statistics agency said yesterday.

“It’s logical for them to be worried about Venezuela,” said Alberto Bernal, head of emerging markets research at Bulltick Securities Corp. in Miami. “But I would stop short of saying it’ll kill the Colombian economy.”

Colombia’s annual inflation slowed to 2.7 percent in October, the statistics agency said. That’s below the bank’s 2009 target of 4.5 percent to 5.5 percent and within its 2010 goal of 2 percent to 4 percent. Uribe said last month that inflation may end the year below October’s level.

Some policy makers “expressed fear” that inflation would rise next year as a result of the cut, forcing the bank to raise interest rates before the economic recovery had been “consolidated.”

Uribe said last month that dry weather caused by the El Nino effect may boost prices through the first half of 2010.

‘Lingering Uncertainty’

The economic recovery may be aided by improved growth prospects for the U.S., Colombia’s No. 1 trading partner, the bank said. Still, there is “lingering uncertainty” about how much U.S. consumption and investment will rebound, according to the minutes.

Colombia’s industrial output fell 3.8 percent in September from a year earlier while retail sales declined 7.3 percent, the biggest drop since at least 2000, according to the statistics agency.

“Most indicators of productive activity do not reflect a more profound slump in economic activity, but do not signal generalized growth either,” according to the minutes.

Meanwhile, consumer and business confidence are at a “standstill,” the bank said.

“They didn’t overreact, lowering rates was the right thing to do,” said Bernal, who forecasts the economy will grow 4 percent next year. “But I don’t think they’ll cut again. There’s an acceleration in civil engineering investment, growth in the mining sector and a stabilization of domestic demand.”

Finance Minister Oscar Ivan Zuluaga, who is also the president of the central bank’s board, has said he hopes as much as 55 trillion pesos ($27.4 billion) of infrastructure spending this year will fuel growth and create as many as 800,000 jobs.

Foreign direct investment in the mining industry more than doubled in the first half of 2009 to $1.72 billion, according to the bank.

Source: bloomberg.com/