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POLL-To cut or not to cut? Analysts divided on Colombia rate decision

Credit: REUTERS/LUISA GONZALEZ

The market is split over whether Colombia's central bank board will continue to trim its benchmark interest rate to boost the coronavirus-battered economy or halt cuts to stem capital outflows, a Reuters poll showed on Tuesday.

By Nelson Bocanegra

BOGOTA, Sept 22 (Reuters) - The market is split over whether Colombia's central bank board will continue to trim its benchmark interest rate to boost the coronavirus-battered economy or halt cuts to stem capital outflows, a Reuters poll showed on Tuesday.

Fourteen of the 26 analysts surveyed said the seven-member board would reduce borrowing costs to a historic low of 1.75% at its meeting on Friday, while the remaining 12 predicted policymakers will hold steady at 2%.

The board has cut the rate by a total of 225 basis points over the last six months amid more than five months of national coronavirus quarantine, which sent unemployment soaring and shuttered businesses.

Low inflation figures for August are set to be repeated in September, sending consumer price growth well below the long-term target of 3% this year and opening the door to more cuts, said Camilo Perez, head economist for Banco de Bogota.

"Low inflation opens space for additional cuts in the interest rate. Add weak activity figures that came out recently, it confirms additional monetary stimulus is necessary," said Perez, who previously predicted an end to cuts.

Meanwhile, other analysts said the board will hold the rate to reduce capital outflows. Policymakers will also want to watch for the effect of previous cuts, they said.

"The worry is that an accelerated effort of greater monetary relaxation could put Colombia in an unfavorable situation in terms of differences in rates, which will put even more pressure on the financing of the current account deficit via capital investment," said Joel Virgen, BNP Paribas' head economist for Mexico and Colombia.

The bank will hold back in case further cuts are needed to stimulate growth, Virgen added.

Capital outflows are already a top factor taken into account by the board, its head said earlier this month.

The board predicts the economy will contract between 6% and 10% this year, while the government predicts a contraction of 5.5%.

(Reporting by Nelson Bocanegra Writing by Julia Symmes Cobb Editing by Jonathan Oatis)

((julia.cobb@thomsonreuters.com; +57-316-389-7187))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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