"Internal demand has slowed significantly," bank chief Jose Dario Uribe said after announcing the rate cut. "This can be explained completely by a strong and unexpected contraction in investment." "The Colombian economy is growing below its potential with projected inflation falling below the target of 3 percent, and no looming upward pressure on it in the future."
After keeping the rate steady since August, the bank last month unexpectedly cut borrowing costs, joining Brazil and other Latin American countries that sought to shield their domestic economies from slack demand overseas. Economists were caught off guard on Thursday when Colombia revealed slower-than-expected 2.1 percent annual growth in the third quarter, its weakest in three years, and a contraction of 0.7 percent against the previous three months. Analysts had forecast annual GDP growth in the three months through September of almost 4 percent.
A Reuters poll immediately after the release of GDP found 16 out of 24 economists expected the bank to cut the rate. That was a complete change in direction from a survey on Monday, in which 23 of 26 experts forecast a hold on the rate. Feeble quarterly numbers in construction, mining and civil works set off alarms that the global crisis had hit Colombia harder than previously thought and may further damage the nation's economic drivers in the coming months.
The government on Thursday revised down its GDP forecast for the full year to between 4 percent and 4.5 percent from an earlier prediction of 4.8 percent. Growth will likely pick up again next year to between 4.5 percent and 5 percent. "This is a reality check." At the policy meeting, the central bank said that growth this year would likely come in "a little below" 4 percent, but expansion would likely pick up again next year.
"In 2013, we expect that some of the factors that eased investment in 2012 will be reversed, pushed by internal demand," Uribe said. The bank's seven-member board struggled to reach agreement on a further cut, even as low inflation provides ample room. Uribe has repeatedly said the bank's main responsibility is to keep inflation under control and prevent bank lending from encouraging too much household indebtedness.
Annual consumer prices in November reached 2.77 percent, lower than 3.06 percent in the previous month and comfortably within the target range of 2 percent to 4 percent. The government will release data for December on January 5.
The government has been under pressure from industrialists, retailers and exporters to bolster growth as weak demand and a strong currency raised concerns factories could start to consider layoffs just as the jobless rate is falling. Industrial production rose a timid 1.2 percent in October after two months of falling output. Retail sales slipped 0.3 percent in October, after a 6.1 percent increase the year before. That followed a reduction in household spending after the bank slowed lending earlier in 2012 by raising reserve requirements on consumer credit.