Colombia’s Unprecedented Rate Rises Win Over Swaps Traders

Updated on
  • Central bankers have boosted the key rate by 325 basis point
  • President Santos says interest rate rises are hurting economy

Colombia’s central bank is persuading traders it can quell the fastest inflation in 16 years.  

Banco de la Republica will keep its key interest rate at 7.75 percent on Wednesday after raising it at a record 11 straight meetings, trading in swaps shows. This would be the first time since the increases started in September 2015 that the contracts signal the benchmark rate will remain unchanged.

The shift comes as traders lower their inflation forecasts, signaling they’re convinced the 3.25 percentage points of rate increases by the central bank will succeed in taming a surge in consumer prices. A majority of analysts in a Bloomberg survey back the call, with 23 of 34 expecting no change, while the remaining 11 see a quarter percentage point increase to 8 percent. Annual inflation quickened to 8.97 percent in July, more than double the upper limit of the bank’s 2 percent to 4 percent target.

A pause will be welcomed by President Juan Manuel Santos, who has called on the bank to end the rate increases because they’re sapping growth. The Andean economy expanded just 2 percent in the second quarter, down from 2.5 percent in the first three months of the year and its slowest pace since 2009.

“Inflation should start to come down quite steeply and the economy is decelerating, so the rate hikes have done their job,” said Munir Jalil, head analyst in Bogota at Citigroup Inc.’s Colombia unit. “This allows policy makers to pause for now, and as we see confirmation that inflation is coming down, they’ll be able to stay put” for the rest of the year.

Colombia’s central bank declined to comment on the rate outlook.