Monday, 15 December 2008

Colombia's Cano Says It's Time to Cut Interest Rates. Do His Colleages at Banrep Agree?

In an interview with Bloomberg, Banco de la Republica director Carlos Gustavo Cano (one of the bank's board members) says that the time has come for the Banrep to slash interest rates. In an unusual interview for any central banker, Cano told Bloomberg reporter Helen Murphy that the reduction is the bank's next step and, moreover, the decision has already been negotiated by the board. But, the question is, is now the time to do it?

There's no doubt that the Colombian economy is probably the one that will suffer the most with the U.S. recession, and to add insult to injury, the ongoing deceleration in Venezuela will only make matters worse. Alianza Valores expects growth to slow down to 2.4% in 2009 from an expected 3.4% this year and 7.7% in 2007. Nevertheless, inflation remains quite high and the currency has shed about one-third of its value against the dollar since August. Inflation is now running close to 8% -- twice the pace of the bank's goal for this and next year. 

Morgan Stanley analysts are betting on a monetary easing of about 200 basis points next year, bringing the benchmark repo rate to about 8%. But some of the problems may not necessarily be on the price front. If the bank is moving towards cutting interest rates is because they have enough evidence that the imbalances in the current account will ease at some point. The question is, will imports decelerate as violently and quickly as exports to the U.S. and Venezuela will do? It seems hard to tell.   

And, what about the fiscal problem? The government has lagged behind in terms of structural reforms to streamline the size of the state and spending has been growing more than GDP growth in real terms. I have little doubt that the remaining Banrep directors are taking into account this issue, so the debate for a rate cut promises to be intense. 

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