Peso Bonds Rally as Colombia ‘Breaks the Back’ of Inflation

  • Aug. inflation lower than all 27 forecasts in Bloomberg survey
  • Finance minister hopes for rate cuts sooner rather than later

Colombia’s local bonds rallied as the country’s annual inflation rate plunged the most in seven years as food supplies recovered from a drought.

Government bonds advanced for a fifth day on Tuesday, with the yield on benchmark 2024 notes dropping 12 basis points to 6.96 percent, the lowest since June 2015. The peso also rallied 2.2 percent to 2,887.13 per dollar at 10:03 a.m. in Bogota, the biggest gain in five weeks.

Consumer prices rose 8.1 percent in August from a year earlier, the national statistics agency said Monday, lower than forecast by all 27 analysts surveyed by Bloomberg, whose median forecast was 8.6 percent.  Juan Lorenzo Maldonado, an economist with Credit Suisse Group AG said he was revising his year-end forecast to 6.2 percent from 6.6 percent after the plunge in August and better-than-expected results in food and tradeable goods.

“We’ve broken the back of inflation,” Colombian President Juan Manuel Santos said in an e-mail sent by the presidency. Policy makers could start to cut interest rates when circumstances permit, he said.

Finance Minister Mauricio Cardenas, who chairs the bank’s policy meetings, concurred that “the worst is over” for inflation, and that he hopes the new trend will allow the bank to cut interest rates “sooner rather than later”, according to an audio sent by his press office. The August inflation report shows that policy makers were right to end the series of rate rises last month, he added.

The central bank last month halted the longest series of interest rate rises since it adopted full-fledged inflation targeting in 1999, amid signs the economy is cooling more than it had forecast. Policy makers have repeatedly said the pick-up in inflation was driven by a drought and a decline in the peso, which they said were one-time effects.

August’s “print bodes well for our long-held view that inflation will likely fall rapidly during the second half of the year, leading to a corresponding improvement in inflation expectations,” Maldonado wrote in a report. “The central bank will likely start lowering the policy rate at the beginning of 2017.”

Annual food price inflation slowed to 13.1 percent in August, from 15.7 percent in July. Inflation of “tradeable” goods slowed to 7.5 percent, from 7.9 percent in July. Tradeables can be exported or substituted for imports and so are sensitive to movements in the exchange rate. The peso has strengthened 6 percent in the past 12 months after falling 39 percent over the previous two years amid lower prices for Colombia’s oil and coal exports.

The central bank left its policy rate unchanged at 7.75 percent in August, after raising it 3.25 percent points at its previous 11 meetings. The economy grew 2 percent in the second quarter from a year earlier, weaker than the central bank’s forecast of 2.6 percent.

Colombia targets inflation of 3 percent, plus or minus one percentage point. Policy makers have pledged to get inflation back within its target range by the end of 2017. The government reached a deal in July to end a 45-day truckers’ strike that had aggravated food price inflation.

(A previous version of this story corrected the month of peak inflation in the fourth paragraph.)

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