Colombia forecasts shift after rate hike surprise
After Colombia’s central bank surprised markets by lifting interest rates on Friday, analysts and investors are re-thinking their expectations on the country
Banco de la República lifted Colombian interest rates
25bp, to 3.5%, on Friday, with increased capital inflows among
the factors for the hike.
It made for an "unusual beginning" to a tightening cycle,
had not signaled the rise, and the decision was not
unanimous, said Siobhan Morden, head of LatAm strategy at
Further rate rises could be "less aggressive", however,
given the bank had made an early start on the cycle, she said
in a research note on Monday. That was supported by BanRep's
indication that a small adjustment now was prudent to cut the
likelihood of sharper moves in the future.
Yet the surprise move has pushed some to re-evaluate their
expectations on the direction of Colombia's monetary
The base rate could reach 4.25% by the end of 2014,
Itaú-Unibanco analysts said in a research note published
on Friday. Previously, they had forecast rates to sit at 3.75%
by year-end. They also expect the peso to end the year on a
stronger footing, at COP1,950, rather than COP2,000, to the
"A tighter than expected monetary policy will certainly
contribute to attracting more inflows to Colombia, at a time
when foreign participation in local market bonds is already
increasing," the bank's analysts said.
Tightening spreads and rising currencies have hit emerging
markets, but have been particularly sharp in Colombia,
especially in sovereign debt, as inflows have grown, the
central bank said on Friday. JPMorgan's decision to increase
the weighting of Colombian peso-denominated sovereign bonds in
two debt indices has driven a rush of cash into the country's
capital markets in recent months.
BanRep also pointed to positive indicators on domestic
growth and inflation, as well as signs of a global economic
recovery in its decision to tighten monetary policy.
Inflation is likely to be a determinant factor in future
rate hikes, Credicorp analysts said in a research note after
the decision. The Andean investment bank expects Colombia's
interest rates to reach 4.5% by year-end.
Markets were pricing in more than 150bp of rate hikes over the
next 12 months, Bank of America Merrill Lynch analysts said on
Monday. The US investment bank expects the rate to rise 100bp
this year. LF