Colombia Swaps Rise on Wagers for Higher Rates to Curb Inflation

  • Traders are betting the key rate will be raised to as high 6%
  • Cenbank's Uribe said Colombia to miss CPI target in 2016

Colombian interest-rate swaps rose for a fifth straight day on speculation the central bank will increase borrowing costs further to rein in inflation expectations.

Three-month swap rates climbed 0.02 percentage point to a new record of 5.66 percent at 11:21 a.m. in Bogota. The swaps have jumped 0.45 percentage point since Oct. 30, when Banco de la Republica unexpectedly raised the benchmark rate by a half percentage point to 5.25 percent. The swaps now show traders are betting policy makers will raise the key rate to as high as 6 percent in the next three months.

Annual inflation jumped to 5.89 percent in October, exceeding all estimates for a third straight month. The central bank targets inflation of 3 percent, plus or minus one percentage point. Central bank Governor Jose Dario Uribe said Friday that inflation would likely end next year "slightly" above 4 percent and that monetary policy must get inflation back to within the target range.

"Investors are extremely worried about inflation and Uribe’s comments that we won’t reach the target next year either aren’t helping," said Otman Gordillo, the head strategist at AdCap Colombia in Bogota. He forecasts the central bank will raise the lending rate another quarter percentage point by year-end.

Finance Minister Mauricio Cardenas said Monday that the government will send a tax bill to Congress in March. While he didn’t provide details, deputy Finance Minister Andres Escobar and Public Credit Director Milena Lopez have previously said the bill may include reducing taxes on foreigners’ bond profits.

Andres Pardo, the head analyst at Corp. Financiera Colombiana, predicts the government would seek to reduce the withholding tax to zero from 14 percent now. That move, he estimates, would help lower the yield on the nation’s benchmark peso bonds due 2024 by 0.3 percentage points.

Yields on the securities rose 0.09 percentage point Monday to 7.92 percent, according to data from the central bank.

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