Colombia Bonds Drop Most in 5 Months on Surprise Rate Increase

Colombia’s bonds declined the most in five months after policy makers unexpectedly increased the target lending rate amid signs of an economic rebound and a pickup in inflation projections.

The price on bonds due in 2024 sank 1.14 centavo to 126.3 centavos per peso at the close of trading in Bogota, according to data from the central bank, the steepest one-day drop since Nov. 8. The yield on the securities rose 13 basis points, or 0.13 percentage point, to 6.41 percent. The peso gained 0.2 percent to 1,938.27 per dollar.

“The market was expecting the central bank to start hiking the rate this year, just not so soon,” Francisco Chaves, the head analyst at Corredores Asociados brokerage, said in a phone interview from Bogota. “Data is signaling the economy is doing well, so policy makers are probably getting ahead of the market to keep inflation expectations in check.”

The seven-member board raised the policy rate on April 25 by a quarter-percentage point to 3.5 percent in a split decision, central bank Governor Jose Dario Uribe told reporters. Only three economists surveyed by Bloomberg had forecast the increase while 26 expected no change. The announcement came after the currency market closed for the week in Bogota.

Consumer spending, employment and industrial output data published over the past month exceeded analysts’ forecasts while consumer prices rose at the fastest pace since 2012. Annual inflation quickened for a fourth straight month in March, accelerating to 2.51 percent, still below the central bank’s midpoint target of 3 percent.

‘Gradual Adjustment’

“A timely and gradual adjustment reduces the need for abrupt changes in the future and ensures macroeconomic stability,” Uribe said after the announcement.

Chaves changed his forecast for the lending rate to end 2014 at 4.25 percent from a previous estimate of 4 percent.

Economists forecast that inflation will end this year at 3 percent, according to the central bank survey published April 16, up from an estimate of 2.85 percent in January. The survey showed that most analysts expected policy makers to start raising interest rates in June.

The central bank’s rate move shows that consumer demand will continue to increase at a good pace, and “the economy is approaching full use of its productive capacity,” Daniel Velandia, the head analyst at Credicorp Capital’s Colombia unit, wrote in an April 25 note to clients. Such conditions are “compatible with a little less expansive posture on monetary policy,” he wrote.

Banco de la Republica will step up its pace of dollar purchases to curb a rally in the local currency, Finance Minister Mauricio Cardenas told reporters April 21. Plans to buy as much as $1 billion this quarter won’t change, he said.

The central bank bought $19.2 million in the currency market today, compared with a daily average of $10.5 million from April 1 to April 16.

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