Colombia Peso Climbs With Swaps After Surprising Rate Decision

  • Peso gains to 6-month high; best performer in Latin America
  • Colombia unexpectedly lifted key rate to 7% on Friday

Colombian swap rates climbed and the peso strengthened after the central bank raised its policy rate by the most since October, surprising analysts that expected a smaller increase.

Three-month rate swaps climbed 0.07 percentage point to 6.76 percent at 9:10 a.m. in Bogota. Nine-month swaps rose 0.13 percentage point to 7.08 percent. Both rates were on course for the highest close in at least five years. The peso strengthened 0.4 percent to a six-month high of 2,838 per U.S. dollar, the biggest gain in Latin America.

Colombia’s central bank raised its benchmark interest rate on Friday by 50 basis points, or 0.5 percentage point, more than analysts forecast as inflation surged to its highest level since 2001 following the most severe drought in decades. The decision, which was not unanimous, was forecast by 10 of 39 analysts surveyed by Bloomberg, with the other 29 predicting a quarter-point increase.

“Following the acceleration of the hiking pace, the key question is what will come next,” Mario Castro, a strategist at Nomura Holdings Inc., wrote in a report. “We believe that risks for inflation and inflation expectations remain skewed to the upside and that the speed of inflation’s convergence with the target band will be slower than consensus expects due to mounting effects from the accumulated pass-through.”

The bank removed language in recent statements when they said they would continue to raise rates and cut its forecast for 2016 economic growth to 2.5 percent from 2.7 percent. The economy expanded 2.5 percent in the first three months of the year from a year earlier, according to the bank’s estimates.

Nomura expects the policy rate to reach 7.5 percent in the next few months and then remain on hold the rest of the year. Citigroup Inc. said the statement and press conference comments didn’t point to strongly to further tightening and expects no more rate increases.

Central bank chief Jose Dario Uribe said in a radio interview that a large part of the pass through from the weaker peso has probably already happened, and that the currency’s recent strength will help curb inflation. The decision to raise interest rates is not just intended to control inflation, but also to help the economy adjust gradually to new conditions of lower income due to oil.

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