Colombia’s bond yields fell Wednesday, after the country’s central bank lowered borrowing costs by a “surprising” half a percentage point.
Yields on peso bonds due in 2014 fell to 3.58% Wednesday morning, amid speculation the central bank would reduce borrowing costs further, according to Bloomberg. This represented the lowest level since 2009. The peso value also plunged.
Friday’s unexpected half a percentage point cut on benchmark interest rates followed four quarter-percentage point reductions since November. According to Banco de la Republica, weak growth and below target inflation prompted the massive cut.
“This decision was taken in light of the fact that the Colombian economy is growing below its potential and probably will operate below its productive capacity in the coming quarters,” read the bank’s statement. Added to this, actual and forecast inflation were under the 3% target.
Economic growth in 2012 was 4%, representing a slowdown from the heady levels witnessed in 2011 (6.6%), and inflation had cooled to a 60-year low, according to Bloomberg.
A “significant reduction” in investment growth came in the second half of 2012, along with a slowdown in the rise of private consumption and a slowdown in the increase in exports. This resulted in “a major loss of momentum,” according to the bank.
The first quarter of 2013 showed a deterioration in trade expectations and a drop in consumer confidence, suggesting reduced momentum in private consumption. This, according to the bank, “denotes current economic growth below potential and, hence an increase of the shortcomings with respect to use of industrial productive capacity.”
The bank considered that Colombia’s trading partners are likely to grow less than expected, meaning that economic growth from external demand would remain low.
If trends continue in prices for major exports, terms of trade would average less in 2013 than last year, meaning there would be no additional boost from an increase in national revenue, according to the central bank.
The bank said that the previous interest rate cuts – 25 basis points a month over the last four months – have been passed on to interest rates on deposits and loans in the financial system. Real interest rates have not fallen to the same extent according to the bank, because of the drop in inflation and expectations.
It is hoped the lower benchmark interest rate will bouy growth and facilitate a move away from a strong currency.
Sources
- Colombia yields fall to record on rate-cut outlook; peso drops (Bloomberg)
- Colombia bond yields plunge on interest-rate cut; peso unchanged (Bloomberg)
- Colombian yields fall ahead of surprise rate cut; peso drops (Bloomberg)
- Banco de la Republica lowers the benchmark interest rate by 50 basis points (BanRep)
