Bloomberg News

Colombian Peso Extends Weekly Gain as Europe Reaches Debt Deal

December 09, 2011

Dec. 9 (Bloomberg) -- Colombia’s peso extended a second weekly gain after European leaders boosted a rescue fund and tightened budget rules to stem the region’s debt crisis, helping buoy demand for higher-yielding assets.

The peso rose 0.3 percent to 1,925.50 per U.S. dollar, from 1,931 yesterday. It added 0.8 percent this week, the second-best performance among the six most-traded Latin American currencies tracked by Bloomberg, behind Chile’s peso.

European leaders holding all-night talks in Brussels added 200 billion euros ($267 billion) to their crisis-fighting capacity and tightened anti-deficit rules, an accord hailed by European Central Bank President Mario Draghi as a “very good outcome.”

“There is certain optimism in the market today,” said Daniel Lozano, an analyst at Serfinco SA brokerage in Bogota.

Colombia’s central bank said in minutes of a Nov. 25 monetary policy meeting published today that the decision to raise the benchmark interest rate a quarter percentage point to 4.75 percent reflected the need to bolster credibility amid expectations for faster inflation. The decision wasn’t unanimous.

The gap between yields on government inflation-indexed bonds due 2013 and similar-maturity fixed-rate debt, a gauge of annual consumer price increase expectations known as the breakeven rate, fell to 3.55 percentage points today from an eight-month high of 3.91 percentage points on Nov. 17.

Policy makers will likely raise the lending rate further in the Dec. 16 meeting, Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York, wrote in a note to clients today.

Rate Outlook

“Another 25 basis points hike would put the benchmark rate closer to what can be defined as a neutral level, while also enhancing Banco de la Republica’s credibility,” Rosen wrote. “This should be bullish” for investors betting on peso gains.

Central bank board members who had voted to leave the lending rate unchanged said the bank should consider “prudential regulatory measures” in addition to interest-rate changes to combat rapid loan growth and record housing costs. They also questioned the move to raise borrowing costs in Colombia after Brazil started cutting rates in August and other countries in the region have signaled they may do the same to safeguard their economies from slowing global growth.

The yield on Colombia’s 10 percent bonds due in July 2024 rose two basis points, or 0.02 percentage point, to 7.56 percent, according to the stock exchange. The bond’s price fell 0.169 centavo to 119.325 centavos per peso.

--Editors: Richard Richtmyer, Brendan Walsh

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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