Friday, 19 December 2008

In a Surprising Decision, Colombia's Banco de la Republica Trims Rates by 50 Basis Points

The Colombian Central Bank trimmed its benchmark lending rate by 50 basis points to 9.5 percent, reflecting concern over the impact of the U.S. recession and the global shortage of credit. In a statement released just a few minutes ago, the bank says that last month's decline in the inflation rate (which went from 7.9 percent to 7.7 percent in November) sets a trend, and that now it looks more likely that inflation will slow down towards the 4.5 percent-5.5 percent range targeted for 2009.

I spoke to a Colombian financial company executive a few weeks ago, and he was surprised that the bank had signaled no rate-cut even as the readings of most economic indicators were indicating a pronounced slowdown in economic activity. For sure, public debt and stocks will rally Monday -- when the markets will open again. I told that executive that my views were that the bank was quite worried with the extreme volatility in the exchange rate markets and the recent signs of fiscal ease. As the Fed moved to trim its rates this week, the Banrep probably won additional space to cut borrowing costs.

Is it possible to extract a more far-reaching conclusion after this decision, that is -- will we see a rally in the peso despite this rate cut? Yes. Banco de la Republica is probably betting on a peso recovery -- or at least, that the pace of the peso devaluation will be slower than that of the dollar. Risky bet, innit? The dollar should lose appeal before investors as rates in the U.S. stay close to zero, while local rates are still high enough to attract more capitals into Colombia. Let's see. However, this is an anticipated Christmas present not only to Colombia's battered financial industry but also for companies and individuals.

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