Lone Latin America Rate Rises Fade as Colombia Hints at Cuts

Traders are betting Colombia will fall into line with other emerging markets and begin cutting interest rates as soon as July after keeping borrowing costs unchanged at 5.25 percent for a fourth straight meeting today.

The yield on three-month interest-rate swaps fell 21 basis points, or 0.21 percentage point, since March 23 to 5.04 percent at 8:11 a.m. in Bogota. It slid to 4.96 percent on June 26, its lowest level on a closing basis since Jan. 30, according to data compiled by Bloomberg. The drop indicates traders expect an interest rate cut within the next three months. Policy makers will keep the benchmark unchanged today, according to all 33 economists surveyed by Bloomberg.

Colombia has raised interest rates nine times since the start of 2011 to cool growth fueled by credit expansion and record investment in its oil and mining industries, even as other emerging markets cut borrowing costs in response to Europe’s worsening debt crisis. With the country’s economy now slowing, and prices for its oil and coal exports falling, traders are wagering that Banco de la Republica will reverse course this year.

“The chances of a rate cut are rising,” said Camilo Perez, the head analyst at Banco de Bogota, the nation’s second-biggest bank. “Colombia’s economy is weaker and the international environment has been deteriorating.”

Global Outlook, Peso

Finance Minister Juan Carlos Echeverry told reporters in Bogota this week that Colombia will cut rates this year “if needed,” and that this will depend on the international scenario. The last time the central bank lowered borrowing costs was in April 2010.

Colombia’s economy grew 4.7 percent in the first quarter from a year earlier, its slowest pace since 2010, as the world’s biggest currency rally this year hurt farmers and manufacturers, while spending on public works slumped.

The peso has strengthened 8.5 percent to 1,784.60 per dollar this year, the biggest gain of 170 currencies tracked by Bloomberg. President Juan Manuel Santos told coffee growers in Medellin this week that he wants the central bank to take “more aggressive” action to weaken the peso.

Santos said he would like to see the peso closer to 2,000 per dollar, and said policy makers should step up dollar purchases. Santos met with central bank board members June 26.

The central bank has said it will buy a minimum of $20 million daily in the spot market until at least Nov. 2.

Oil, Rate Forecasts

As lower oil prices push declines in the peso, the central bank likely won’t announce additional dollar purchases, said Perez and Alejandro Reyes, head analyst at Ultrabursatiles SA brokerage.

“If oil continues to fall, we will see a natural decline in the peso,” said Reyes. “There isn’t much room for more dollar purchases and even then, it would be hard to believe more intervention would drive the peso to 2,000.”

After government reports last week showed industrial output and retail sales unexpectedly fell in April, more economists are forecasting interest rate cuts this year after previously predicting higher borrowing costs.

A Citigroup Inc. survey of economists published June 27 shows the average estimate for the year-end rate fell to 5.17 percent from 5.43 percent in last month’s survey.

Domestic Demand

Retail sales slumped 2.8 percent in April from a year earlier, a worse result than all 16 forecasts in a Bloomberg survey of economists, whose median estimate was for a 4.1 percent increase.

Industrial output also fell unexpectedly, while urban unemployment rose and building permits fell 29.7 percent from a year earlier.

Last month, the central bank cited slowing consumer demand, the worsening European debt crisis and cheaper oil in its decision to hold rates. Annual inflation slowed to 3.44 percent in May, the second-lowest rate after Chile of 13 Latin American economies tracked by Bloomberg, from 3.73 percent at the start of the year.

The central bank targets inflation of 3 percent, plus or minus one percentage point.

Oil exports rose 70 percent to $28 billion dollars last year, while exports of coal rose 40 percent to $8.4 billion. Oil accounted for 49 percent of the country’s sales abroad last year. The price of crude has slumped 17 percent this year.

The yield on Colombia’s benchmark 10 percent peso-denominated bond due in July 2024 fell three basis points to 6.98 percent, according to the stock exchange.

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