Bloomberg News

Colombian Yields Fall Ahead of Surprise Rate Cut; Peso Drops

March 22, 2013

Colombia’s peso bond yields fell before the central bank policy meeting at which policy makers unexpectedly lowered interest rates by a half percentage point.

Yields on peso bonds due in 2024 fell nine basis points, or 0.09 percentage point, to 5.11 percent today in Bogota. The peso depreciated 0.5 percent to 1,828.40 per U.S. dollar and plunged 1.2 percent this week. The rate decision was announced after the close of Colombia’s bond and currency markets.

Banco de la Republica unexpectedly accelerated the pace of interest rate cuts after inflation cooled to a six-decade low and the economy grew at the weakest pace in the Andean region. Policy makers lowered the key lending rate 50 basis points to 3.25 percent, surprising all 32 analysts surveyed by Bloomberg. Twenty-seven economists forecast a quarter-point cut while five expected no change. The bank reduced the benchmark rate by a quarter point at each of its last four meetings.

“This was definitely a surprise and should provide additional room for gains in bonds,” said Alejandro Salamanca, a debt strategist at Serfinco SA brokerage in Bogota.

Yields on the bonds due 2024 have plunged 56 basis points this year as policy makers cut the overnight lending rate by 200 basis points since July, the most among emerging market countries, to buoy growth in the Andean country.

The yields rose 18 basis points this week, the biggest since the period ended Nov. 2, as as a report showing higher- than-expected economic growth led some traders to pare bets that the central bank would cut the rate further.

Economic Growth

The unanimous decision was taken as the economy grows below potential, central bank Governor Jose Dario Uribe told reporters today after the monetary policy meeting. Finance Minister Mauricio Cardenas, who is also president of the bank’s board, said the rate cut will help the economy expand toward its potential rate of 4.8 percent per year.

Gross domestic product grew 3.1 percent in the fourth quarter from a year earlier, according to a government report yesterday, exceeding the median forecast of 3 percent among analysts surveyed by Bloomberg. GDP expanded 4 percent in 2012, outpacing central bank estimates of 3.3 percent to 3.9 percent. The economy grew a revised 6.6 percent in 2011, compared with an initially reported 5.9 percent.

Cardenas said in an interview on Blu Radio today that the government seeks a “more competitive” exchange rate.

“We aren’t economists of the orthodox tradition who say the market should determine the exchange rate,” Cardenas said. “We believe firmly that you have to intervene. That is, it isn’t the invisible hand of the market, but the visible hand of the state, to achieve a more competitive exchange rate.”

Cardenas told reporters today that the lower interest rate will help “break with expectations for a stronger currency.”

“Its a fundamental step and we will see a more competitive exchange rate,” Cardenas said.

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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