Colombia Yields Fall to Record on Rate Cut Outlook; Peso Gains

March 27 (Bloomberg) -- Colombian peso bond yields fell to a record low on speculation the central bank may reduce borrowing costs further after an unexpected half-percentage point cut last week.

Yields on peso bonds due in May 2014 dropped seven basis points, or 0.07 percentage point, to 3.52 percent at the close of trading in Bogota, according to the central bank. That’s the lowest level on a closing basis since the securities began trading in 2009.

Banco de la Republica accelerated the pace of reductions in borrowing costs when it cut the target lending rate by 50 basis points to 3.25 percent on March 22. Policy makers reduced benchmark borrowing costs by a quarter-percentage point at each of the four previous meetings. Last week’s decision surprised all 32 analysts surveyed by Bloomberg, with 27 of them forecasting another quarter-point cut last week while five projected no change.

“The move took everyone by surprise,” said Eduardo Bolanos, an analyst at Asesores en Valores SA brokerage in Bogota. “We’ve seen weak numbers out of Colombia so if these continue, this might not be the last cut.”

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

The economy grew 4 percent in 2012 after expanding 6.6 percent in 2011. In January, industrial output declined and retail sales rose at the slowest pace since October, the national statistics agency reported March 22.

The peso rose for the first time in 10 days, advancing 0.3 percent to 1,825.13 per U.S. dollar. It slumped 3.2 percent in the first quarter and slid 0.7 percent this month. Colombian markets are closed March 28-29.

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