(Updates yield spread in 10th paragraph and economist estimates in 12th paragraph.)
Dec. 15 (Bloomberg) -- Colombia’s central bank, the most aggressive in the Americas this year in fighting inflation after raising interest rates seven times, will increase borrowing costs again as soon as May, trading in the swaps market shows.
“The central bank still has a ways to go,” said Nader Nazmi, a Latin America economist at BNP Paribas in New York, who predicts the bank will lift its key rate in the first quarter. “The current interest rate is still very accommodative.”
Board members, who are meeting tomorrow to set monetary policy, will boost the overnight rate 25 basis points, or 0.25 percentage point, to 5 percent as early as May to keep inflation in check, according to six-month interest-rate swaps trading data compiled by Bloomberg. In November, the central bank raised the rate by 25 basis points to 4.75 percent, the first increase since July.
Traders are betting on another increase even after President Juan Manuel Santos said on Dec. 6 that such a move wouldn’t be “appropriate” as central banks from Brazil to Australia cut borrowing costs to contend with a slower global expansion. Banco de la Republica said in minutes of the November meeting that it raised rates to bolster its credibility after “strong” growth drove up inflation expectations.
Latin America’s fifth-largest economy may grow as much as 6 percent in 2011, the fastest pace since 2007, according to the central bank. The International Monetary Fund predicts South American economies will expand 4.9 percent this year.
Annual inflation quickened to 4.02 percent in October, breaching the central bank’s target range for the first time since 2009, before slowing to 3.96 percent in November. Banco de la Republica targets inflation between 2 percent and 4 percent this year and next.
Higher interest rates in Colombia are bucking a global trend for looser monetary policy. Concern that Europe’s debt crisis will deepen the global slowdown has prompted Brazil’s central bank to cut the benchmark rate three times to 11 percent after last cutting it in July while policy makers in Chile, Peru and Mexico have indicated they may lower borrowing costs.
China’s central bank reduced the amount of cash that banks must hold as reserves on Nov. 30 for the first time since 2008. The same day, the Federal Reserve and five other central banks cut the costs of emergency dollar funding to European lenders to alleviate a credit crunch.
Colombia’s November rate increase reversed the increase in inflation expectations, said Munir Jalil, the chief economist at Citigroup’s Colombia unit.
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, fell to 3.56 percentage points today, from 3.91 on Nov. 17, the highest level since March 4.
“The central bank’s message was loud and clear: I want to control inflation expectations,” said Jalil, a former central bank official who helped make inflation forecasts. “And the market understood it.”
He predicts the bank will increase borrowing costs next year in the second quarter after leaving interest-rates unchanged at tomorrow’s meeting. Jalil is among 26 of 32 economists surveyed by Bloomberg that predict no change tomorrow. The others forecast an increase to 5 percent.
Colombia’s six-month interest-rate swaps at 4.77 percent show traders pricing in a 25 basis point increase in the benchmark rate in May, according to data compiled by Bloomberg. The swaps reflect traders’ views of the likely average of future benchmark rates during the life of the contract.
Yields on Colombia’s peso bonds due in August 2012 fell to 5.24 percent today from 5.50 percent on Nov. 24, a day before the central bank raised interest rates, as investors priced in slower inflation, according to Camilo Contreras, an analyst at Ultrabursatiles SA brokerage in Bogota.
Most Banco de la Republica policy makers said lifting the key rate in November was “prudent” given rapid loan growth and record housing costs, according to minutes of the meeting.
Total lending rose 25 percent to 207.2 trillion pesos ($107 billion) in October, up from 168.8 trillion pesos in the same month a year ago. The increase marked the eighth straight month that lending expanded at an annual pace exceeding 20 percent.
The central bank could reverse course if the global economy worsens, Colombian policy makers said in the meeting minutes published Dec. 9.
“Increasing the rates today might not bring about a heavy cost if the foreign situation suddenly deteriorates in the near future,” they said, according to the minutes. “This is easily detectable and the policy would be reversed.”
Lower interest rates worldwide and Banco de la Republica’s “dovish tone” in the Nov. 25 statement means it will likely leave rates unchanged through 2012, according to Benito Berber, a strategist at Nomura Holdings Inc. in New York.
“The threshold for rate increases is getting increasingly complicated,” Berber said. “Given the gray clouds internationally, the rate is appropriate. It’s a bit exaggerated to expect more hikes.”
Central bank board members who had voted to leave the lending rate unchanged questioned the decision given moves by monetary authorities elsewhere to loosen policy, according to the minutes.
“Why should Colombia be different from the rest of the world except for India or Iceland?” they said. The bank should consider “prudential regulatory measures” in addition to interest-rate changes to combat rapid loan growth and record housing costs, the dissenting board members said, according to the minutes.
Most of the economists in a central bank survey published Dec. 12 forecast policy makers will increase the key rate by a quarter percentage point to 5 percent in March.
Felipe Campos, the head analyst at brokerage Alianza Valores SA in Bogota, predicts the central bank will raise interest rates further in the first quarter, leaving the benchmark at 6 percent at the end of next year as it “chases down” inflation. He predicts consumer prices will rise 3.73 percent this year and 4.5 percent next year.
“Banco de la Republica has always prioritized inflation over growth,” Campos said. “Given inflation dynamics and accelerating growth, it will be forced” to raise rates further, he said.
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