November 15, 2018 / 4:26 PM / a month ago

UPDATE 2-Colombia's GDP grew 2.7 pct in third quarter, less than expected

(Adds revised central bank GDP estimate, comment from bank chief)

BOGOTA, Nov 15 (Reuters) - Colombia’s economy expanded less than expected in the third quarter, the government’s statistics agency said on Thursday, indicating that months of rate cuts by the central bank may be having a slower effect than hoped.

Gross domestic product grew 2.7 percent in the third quarter, better than the 1.7 percent growth in the same three-month period of 2017, but less than the 3 percent predicted by the market.

The economy expanded 0.2 percent from the second quarter, the DANE agency said, while GDP growth from January to September was 2.5 percent.

Growth was driven by public administration, defense, education and health, which rose 4.5 percent, followed by information and communication, up 3.7 percent, then professional, scientific and technical activities, which grew 3.6 percent.

This quarter was the first since 2014 when no sector contracted, the agency said.

The central bank on Thursday revised down predictions for 2018 and 2019 economic growth.

Bank Chief Juan Jose Echavarria said - after GDP data was released - that the economy this year could expand 2.6 percent, down from a previous estimate of 2.7 percent. The bank also cut its growth estimate for 2019 to 3.5 percent from 3.7 percent.

The economy faces a tough time in the coming quarters, as a new tax reform heading through Congress aims to increase value added tax on food items and other basic goods as well as raise tariffs for the middle class and high earners.

“It’s clear that economic recovery, though it continues, has been moderated by news of the tax reform, which has affected consumer confidence,” Camilo Perez, head economist at the Banco de Bogota said.

Economists have warned such taxes will push inflation higher, damping any nascent economic growth.

The tax reform makes it likely a tightening cycle may be on the cards sooner rather than later.

The central bank cut 350 points from the benchmark lending rate since December 2006, leaving it at 4.25 percent for the last seven months in a bid to stimulate the economy after more than two years of grappling with the fallout from a decline in global oil prices.

Echavarria said that while economists expect the rate to be raised next year by 100 points, it is unlikely.

“That could occur if the economy grows a lot, or there’s a big devaluation, or devaluation hits inflation and expectations, or there’s an impact from tax reform,” said Echavarria.

“We’ll see, but we don’t react to shocks immediately.” (Reporting by Helen Murphy, Julia Symmes Cobb and Nelson Bocanegra; Editing by Bernadette Baum and Nick Zieminski)

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