Colombia to Keep Rate at Three-Year High, Survey Shows

Colombian traders and economists predict the central bank will hold borrowing costs at a three year high for a third month even after policy makers warned a surge in credit risks fanning inflation.

The seven member board, led by bank chief José Dario Uribe, will keep the overnight lending rate at 5.25 percent when it next meets may 28, according to all 25 economists. 

Trading in three month interest rate swaps, which are little changed at 5.10 percent, indicate investors aren’t expecting a move in the next three meetings.

Colombia has defied a global trend for lower rates as domestic demand and record foreign investment helped power the fastest economic growth since 2.007. 

As policy makers warn of the risks of an increase in consumer loans, which grew 22 percent in March, economists are sticking with forecasts for higher interest rates later this year, setting themselves apart from traders betting on no change after inflation slowed to within the central bank’s target.

“Most signs point to growth moderating this year, allowing the central bank to leave rates on hold for now,” said Andres Pardo, the Bogotá based head analyst at financial services holding company Corp. Financiera Colombiana. “

Inflation is under control and inflation expectations have eased. 

The only factor that worries the central bank and points to an increase is consumer demand.”

Policy Makers Divided

Uribe urged Colombians last week to avoid taking on too much debt, citing Greece as an example.

“There is still room for at least one more hike,” said Brian Lesmes, a senior economist in Bogotá at Bancolombia SA (BCOLO), the nation’s biggest bank. “

The central bank doesn’t feel comfortable with the pace of consumer lending.”

Banco de la República has raised the key rate nine times since February 2.011, bringing it up from a record low 3 percent as inflation accelerated to as fast as 4.02 percent in October. 

Policy makers kept borrowing costs on hold at their march and april meetings, voting unanimously last month.

Still, minutes of the April 30 monetary policy meeting showed that central bankers were divided on the outlook for inflation, with some concerned that growing domestic demand may lead to price increases, while others saw no such risk.

Colombia’s interest rate increases have helped make the peso the world’s second-best performing currency this year as investors seek out higher yielding assets amid record-low borrowing costs in the U.S., Europe and Japan. 

The peso has climbed 5.8 percent this year, trailing only Madagascar’s ariary among the currencies tracked.

Avoiding ‘Future Problems’

Trading in six-month and one year interest rate swaps reflect bets that rates won’t change through the rest of the year. 

Six-month swaps were little changed at 5.12 percent today from a record-high 5.48 percent Feb. 22, two days before policy makers raised borrowing costs. 

One-year swaps rose one basis point, or 0.01 percentage point, to 5.2 percent today.

The median estimate of 26 economists surveyed by Citigroup Inc. points to a 25 basis point increase to the key rate by year-end, according to a report published May 23. 

That’s in line with a May 11 central bank report showing most economists expect policy makers to raise the key lending rate 25 basis points to 5.5 percent in September.

The South American nation moved to slow the pace of consumer credit growth last week by increasing reserve requirements for lenders that have seen a rise in delinquent loans. 

Forcing banks to set more money aside will help avoid “future problems,” Finance Minister Juan Carlos Echeverry said in a May 18 statement.

Macro prudential measures

Policy makers may adopt additional measures to curb credit growth without raising the benchmark rate, Francisco Rodriguez, a New York based economist at Bank of America Merrill Lynch.

“Authorities will continue to consider macro prudential measures of this type and shy away from further rate increases,” Rodriguez wrote.

Consumer borrowing is increasing after the economy grew 5.9 percent last year, the most since gross domestic product jumped 6.9 percent in 2.007. 

The economy will grow about 5 percent in 2.012, Uribe said last week. 

That compares with International Monetary Fund forecasts for expansion of 5.5 percent this year in Perú, 2.1 percent in the U.S. and 3 percent in Brazil.

Rate Horizon

The gap between yields on government inflation-indexed bonds due 2.013 and similar-maturity fixed rate debt, a gauge of expectations for annual consumer price increases, fell to 2.35 percentage points, from an 11-month high of 4.07 on Feb. 17.

Colombia’s industrial production fell 0.9 percent in March from a year earlier, the first annual decline since October 2.009. 

Retail sales rose 5.1 percent in the same month, the 30th consecutive month of increases.

Annual inflation was 3.43 percent in April, within the central bank’s 2 percent to 4 percent target range. 

Inflation this year and next will be close to 3 percent, while consumer price increases in 2.014 will be “slightly” below that level, Uribe said in a presentation last week.

Banco de la República “will remain on hold for the rest of the year,” said Bret Rosen, a Latin America strategist at Standard Chartered Bank in New York.

“Inflation expectations have come down, and the central bank isn’t expressing much worry.”