Traders are increasing bets that Colombia will reduce interest rates this month to the lowest in Latin America, after some policy makers voted for bigger cuts in December and the inflation rate fell to a two-year low.
The yield on three-month interest-rate swaps has fallen 20 basis points, or 0.20 percentage point, to 3.99 percent, since the bank last cut borrowing costs on Dec. 21. That implies about an 80 percent chance of another quarter-point reduction to 4 percent at the central bank’s January board meeting, according to Catalina Silva, a fixed-income analyst at Cia. De Profesionales de Bolsa in Bogota.
The bank has lowered interest rates at four of its last six meetings as the economy grew in the third quarter at its weakest pace since the aftermath of the global financial crisis in 2008. With inflation below the 3 percent midpoint of the bank’s target range since November, some policy makers said at the bank’s last meeting that a half-point cut was needed.
The policy maker’s votes in favor of a bigger cut “supports our forecast that even more rate cuts are to come,” Juan David Ballen, an analyst at local brokerage Alianza Valores SA, said in a telephone interview from Bogota. “It would be prudent to take advantage of inflation being so low to keep lowering rates.”
Ballen, the most-accurate forecaster of Colombian central bank decisions in Bloomberg surveys, is predicting cuts of 0.25 percentage points at the bank’s January and February meetings.
The seven-member board was split three ways when it lowered the benchmark interest rate on Dec. 21, a decision that surprised the majority of analysts for the third time since June. The policy makers who supported a bigger cut said that “almost all indicators on the progress of the economy denote an apparent deterioration.”
Only one of the seven-member board voted to hold rates, the outcome forecast by a majority of analysts surveyed by Bloomberg.
The yield on the government’s 9.25 percent peso debt due in May 2014 fell eight basis points to 4.33 percent this week, as traders increased bets on rate cuts.
At 4.25 percent, Colombia and Peru currently have lowest policy rates among major Latin American economies.
Chile has a policy rate of 5 percent, while Mexico’s is 4.5 percent. Brazil, the region’s biggest economy, has a 7.25 percent rate.
Colombia’s economy expanded 2.1 percent in the third quarter from a year earlier, versus 6.5 percent in Peru and 5.7 percent in Chile.
Inflation slowed to 2.44 percent in December, lower than all but one forecast in a Bloomberg survey of 22 analysts. Measures of core inflation tracked by the central bank, which exclude the most volatile prices, also fell last month.
Investors’ expectations for cost-of-living increases have fallen to 2.5 percent from this year’s high of 4.1 percent in February, based on the yield gap between inflation-linked bonds and fixed-rate debt due in 2015.
“Inflation, the average of core inflation indicators and most measures of inflation expectations are below 3 percent,” policy makers said Dec. 21 in the statement accompanying their rate cut. “The latest information suggests that this situation will continue for some time.”
Colombia targets inflation of 3 percent, plus or minus one percentage point. The central bank’s press office declined to comment on its future rate moves in an e-mailed statement.
Policy makers may wait for more data confirming the slowdown before they cut again, according to Munir Jalil, the chief economist at Citigroup Inc.’s Colombia unit.
“We see a central bank whose priority is the recovery of economic activity,” Jalil said in telephone interview from Bogota. “In the first quarter, we could see an additional cut, though not necessarily in January.”
The peso climbed 0.1 percent to 1,768.73 per dollar at the close yesterday in Bogota.
The cost to protect Colombian debt against non-payment for five years was unchanged at 94 basis points yesterday, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
The extra yield investors demand to own Colombian government dollar bonds instead of Treasuries widened one basis point to 117 basis points, according to JPMorgan Chase & Co.
“Those who voted for the bigger cut will surely insist on a lower rate in the next meeting,” Andres Pardo, the head analyst at Corp. Financiera Colombiana, said in a telephone interview. “The issue will be if the members who were in the majority last time will be persuaded that there’s room to cut again. With inflation so low, it’s possible that a couple will be swayed to cut.”