Colombia's Bonds Climb on Inflation Report as Peso Leads Gains

  • Food inflation slowed for first time since July amid El Nino
  • Colombian peso best performer among 31 major currencies

Colombia bonds rallied to the highest in three months after inflation accelerated less than forecast, opening room for smaller interest-rate increases from the central bank. The peso led world gains.

Local government bonds due in November 2018 gained 0.61 centavo to 94.74 centavos per peso at the close of trading in Bogota and yields dropped 0.26 percentage point to 7.19 percent. The peso gained 1.4 percent to 3,114.33 per dollar, leading advances among 31 major currencies, as oil, the country’s biggest export, rose to $40 a barrel for the first time since December.

While February’s 7.59 percent inflation rate is still well above the central bank’s target, the lower-than-expected increase is spurring speculation that policy makers will raise interest rates this year to just 6.5 percent, below the 7 percent that some investors had been anticipating, according to Esteban Tamayo, an analyst at Citigroup Inc.’s Colombia unit. The central bank lifted its benchmark rate for a sixth straight month in February, to 6.25 percent, to try to curb inflation expectations.

“The question on everyone’s mind is how much further the central bank has to go in terms of rate hikes,” Tamayo said.

Analysts surveyed by Bloomberg had predicted inflation of 7.74 percent in February, according to the median forecast, and some had said it would accelerate to the fastest since 2001 as the El Nino weather phenomenon spurs food-price increases and the weaker peso boosts costs for tradable goods, which are sensitive to movements in the exchange rate. Instead, food-price increases waned and tradables inflation slowed for the first time since 2014.

Inflation likely peaked in February or March which reinforces Citigroup’s view of just one more hike, Tamayo said.

While it may be too early to say that Colombia has passed the peak in tradables inflation, last month’s behavior may imply lower pressures ahead, Daniel Velandia, the head analyst at Credicorp Capital’s Colombia unit wrote in a research report. “Recent COP depreciation may contribute to moderate expectations,” he wrote in the report.

Colombia’s peso, which reached a record low in February, has erased its yearly decline and is up 1.9 percent in 2016.

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