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Colombia Rate Increase Spurs Biggest Bond Gain in Seven Weeks

Colombia’s peso bonds gained the most in seven weeks after the central bank raised its benchmark lending rate, damping investor concern that inflation will keep accelerating.

The yield on the 10 percent bonds due in July 2024 fell four basis points, or 0.04 percentage point, to 7.64 percent today, according to the stock exchange. The yield decline is the biggest since Oct. 10. The bond’s price rose 0.35 centavo to 118.636 centavos per peso.

The central bank raised the overnight lending rate by 25 basis points to 4.75 percent on Nov. 25, making Colombia the only country in Latin America to raise rates in the past four months. Brazil started cutting borrowing costs in August as countries across emerging markets shifted to policies that aim to safeguard their economies from the global slowdown.

“Colombia moved from an expansionary monetary policy, which set it apart from other countries in the region, to a stance the central bank suggests is neutral,” said Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut. “The decision helps anchor inflation expectations and addresses the concern the central bank had about potential imbalances caused by strong domestic demand.”

The peso advanced 0.4 percent to 1,949.78 per U.S. dollar, from 1,956.68 on Nov. 25.

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 3.89 percentage points today from an eight-month high of 3.91 percentage points on Nov. 17.

Rate Outlook

Central banks across five continents are undertaking the broadest reduction in borrowing costs since 2009 to avert a global economic slump stemming from Europe’s sovereign-debt turmoil. Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections from JPMorgan, which tracks 31 central banks.

Europe’s turmoil has led Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan to reduce interest rates since late August. Chile, Mexico, Norway, Peru, Poland and Sweden are also forecast by JPMorgan Chase to lower borrowing costs by the end of the first quarter, while Australia, Brazil, Indonesia, Israel and Romania may cut rates further.

Meanwhile Colombia’s economy has shown few signs of slowing. Policy makers on Oct. 28 noted low interest rates had helped drive the economy’s “very dynamic” internal demand, rapid loan growth and record housing costs.

Annual Inflation

Latin America’s fifth-largest economy may grow as much as 6 percent in 2011, the fastest expansion since the 6.9 percent pace achieved in 2007, according to Banco de la Republica.

Colombia’s annual inflation quickened to 4.02 percent in October, above the central bank’s 2 percent to 4 percent target range for this year. It was the first time since 2009 that inflation exceeded the bank’s target.

Finance Minister Juan Carlos Echeverry, who is also president of the central bank’s board, told reporters on Nov. 25 that the rate increase sends a “strong” message to investors that inflation will move toward 3 percent, the mid-point of the bank’s target for this year.

‘Dovish Tone’

Daniel Velandia, head of research at Bogota-based brokerage Correval SA, forecasts inflation will end this year at 3.67 percent.

Eighteen of 35 economists surveyed by Bloomberg forecast the rate increase. Seventeen analysts expected the bank to keep the rate at 4.5 percent.

“While the decision of BanRep was certainly hawkish, in the sense of placing much more importance on domestic factors rather than on the deteriorating external backdrop, it has a dovish tone,” Nomura Holdings Inc. strategist Benito Berber wrote in a report today. Colombia’s central bank “is not about to initiate a protracted tightening cycle.”

Berber forecasts the key rate will end this year at 4.75 percent and at 5 percent in 2012.

Barclays Capital Inc. Latin America analysts Alejandro Arreaza and Alejandro Grisanti said in a report today they changed their call to no additional rate hikes this year. They predict the benchmark rate will end next year at 5.5 percent.

The rate increase, which wasn’t a unanimous decision among the bank’s board members, is “sufficient for now,” central bank chief Jose Dario Uribe told reporters after the meeting.

The move also allows for the “early detection of a substantial change in external conditions of the economy and to react quickly to it,” policy makers said in their statement.

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