The Colombian peso’s rally to a seven-year high against the Brazilian real is a signal to policy makers to cut interest rates in an effort to curb foreigners’ demand for the country’s fixed-income assets, said former Finance Minister Alberto Carrasquilla.
The peso has surged 28 percent in the past 12 months to 878.3744 per real and touched a seven-year high of 856.7781 on June 27. While Brazilian central bankers have cut their benchmark lending rate 400 basis points, or 4 percentage points, since August to 8.5 percent, Colombian policy makers have raised their rate 75 basis points to 5.25 percent.
The different tacks by the two South American countries are luring carry-trade investors away from the Brazilian real and into the peso, said Carrasquilla, who founded Bogota-based Konfigura Capital after serving as Colombia’s finance minister from 2003 to 2007. In the carry trade, investors buy higher-yielding assets with funds borrowed from countries with lower interest rates.
“The interest rate is inducing a stronger exchange rate,” Carrasquilla said in an interview today in his Bogota office. “There are clear incentives toward a carry trade and that will continue until we get in line” with other countries, he said.
Colombian central bankers will likely wait until second-quarter growth figures are released in September to begin reducing rates, Carrasquilla said. Policy makers held the key rate for a fourth straight month at 5.25 percent on June 29 as growth cooled and prices of the country’s commodity exports dropped. Government reports last month showed industrial output and retail sales fell in April and the economy expanded 4.7 percent in the first quarter, its slowest pace since 2010.
Carrasquilla predicts at least a 25 basis-point cut by year-end, a move he said would cool demand for the peso by signaling to investors that rates are heading lower.
“There is no question there will be a cut,” Carrasquilla said. “The question is when.”