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Colombia Yields Decline on Inflation; Peso Little Changed

Colombia’s peso bond yields fell to a record low after inflation slowed more than analysts forecast in December, fueling speculation that policy makers will further reduce borrowing costs to buoy economic growth.

The yield on the government’s 10 percent peso-denominated debt due 2024 plunged 10 basis points, or 0.1 percentage point, to 5.59 percent, according to the central bank. That’s the lowest level since the securities were first issued in 2009. The price rose 0.953 centavo to 136.74 centavos per peso. Colombian markets were closed yesterday for a holiday.

Consumer prices rose 0.09 percent in December from a month earlier, the national statistics agency said Jan. 5, less than the 0.26 percent median estimate of 23 economists surveyed by Bloomberg. Annual inflation slowed to 2.44 percent, below the central bank’s 3 percent mid-point of policy makers’ target.

“Low inflation increases policy flexibility,” Felipe Hernandez, a Stamford, Connecticut-based economist at Royal Bank of Scotland Group Plc, wrote in a note to clients today. He predicts Banco de la Republica will cut the overnight lending rate a quarter percentage point to 4 percent this month and sees “a high probability for at least one more cut” of 25 basis points later this year.

Central bank minutes released Jan. 4 indicated the board was split three ways when it surprised analysts by lowering the benchmark interest rate by 25 basis points on Dec. 21 to 4.25 percent. More than one policy maker voted for a 50 basis point cut and one opted for no change.

Peso Performance

The peso was little changed at 1,771.20 per U.S. dollar. The currency touched 1,750.50 on Jan. 2, the strongest intraday level since July 2011.

That same day central bank Governor Jose Dario Uribe said on RCN Radio that the strength of the peso is a concern and reiterated Banco de la Republica will buy a minimum of $20 million a day through at least the first quarter. The central bank printed pesos to buy a record $4.4 billion last year.

The economy grew 2.1 percent in the third quarter from a year earlier, less than half the 4.9 percent rate in the prior three months, the government reported Dec. 20. That was weaker than all 28 forecasts compiled by Bloomberg. Uribe has said the economy likely grew less than 4 percent in 2012 after expanding 5.9 percent in 2011.

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