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Colombia Central Bank Raises Rates to Stem Inflation (Update1)

Colombia Central Bank Raises Rates to Stem Inflation (Update1)

By Helen Murphy

Feb. 22 (Bloomberg) -- Colombia's central bank unexpectedly raised its benchmark lending rate by a quarter percentage point in a bid to tame accelerating inflation.

Policy makers increased the overnight interbank rate to 9.75 percent, surprising 24 of 37 economists surveyed by Bloomberg. Most analysts expected the rate to stay at 9.50 percent.

The central bank's seven-member board has raised lending rates by 2.5 percentage points in the past 15 months. Policy makers had kept rates unchanged the previous two months because of concern that an increase would further strengthen the peso or unnecessarily slow economic growth.

``Inflation remains elevated and expectations continue to deteriorate,'' said Bertrand Delgado, from IDEAglobal Inc., a New York-based research company. ``There is the risk of the U.S. economy affecting Colombia, but international food prices remain high, so inflationary pressure persists.''

The bank said today in a statement that it was forced to raise rates to control inflation. Economic growth and employment would have been reduced without the move, it said.

``The board will continue to carefully monitor the international situation, actual and projected inflation, and growth,'' policy makers wrote. ``Future monetary policy will depend on future information available.''

Zuluaga's Views

Finance Minister Oscar Ivan Zuluaga, the government's representative on the board, said Feb. 19 that rates shouldn't be raised further. He has voiced concern that the spread between U.S. and Colombian interest rates may stimulate further inflows of capital, strengthening the peso against the dollar and making Colombian exports less competitive overseas.

The government has earmarked 300 billion pesos ($158 million) in subsidies to exporters such as textile makers and the agriculture industry to prevent layoffs as the currency strengthens. Colombia's peso has appreciated 54 percent in five years, hurting exports, which account for more than 18 percent of Colombia's $130 billion gross domestic product.

The peso was little changed at 1,897.85 per dollar when markets closed at 1 p.m. in New York, according to the Colombian foreign-exchange electronic transactions system. The market closed before the central bank's rate decision.

Economic expansion may slow this year to as low as 3.7 percent from as much as 7 percent last year if the U.S. sees no growth. That may eventually require a rate cut to bolster consumer spending, central bank director Carlos Gustavo Cano said in an interview Feb. 13.

Consumer Prices

Consumer prices rose 1.06 percent in January, more than economists expected, and the annual inflation rate accelerated to 6 percent from 5.69 percent a month earlier. Colombia missed its 3.5 percent to 4.5 percent inflation target.

``The numbers show the need for a hike in the rates,'' said Pedro Tuesta, an economist at 4Cast Inc. in New York.

Colombians have increased their spending since 2002 when President Alvaro Uribe took office and began his battle with drug-funded guerrillas and paramilitaries, making roads safer and increasing Colombians' confidence to purchase cars and property.

To contact the reporter on this story: Helen Murphy in Bogota at Hmurphy1 at bloomberg.net

Last Updated: February 22, 2008 13:28 EST

By sloopskipper on Feb 22, 2008, 13:20 in Friendly Talkzone.

sloopskipper says on Feb 22, 2008, 14:08:

bump

tejasmarcos says on Feb 22, 2008, 14:49:

it's scary when even the experts are wrong. i think there is more at play than we can see here. there is info out now stating 22-24 billion in foreign investment deals are being proposed for 2008. even if half of that figure closed, it would almost equate to total foreign investments for all of 2006 & 2007. any soothsayers out there in pbh land?

trying to walk a straight line on sour mash and cheap wine...

rocinante says on Feb 22, 2008, 15:13:

Experts? The Bloomberg Analysts wouldn't know the difference between preferred stock and live stock.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

sloopskipper says on Feb 22, 2008, 15:13:

Not me, it's not looking pretty. Disney, anyone?

The next Panamá, or Orlando/Miami?

rocinante says on Feb 22, 2008, 15:15:

Not me either. Never in a million years. The dollar will never see 2100 COP again and I doubt 2000. The US just doesn't have the upside growth potential - and - Colombia at the same time would have to endure some really tough shit.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

sloopskipper says on Feb 22, 2008, 15:16:

Cartagena be a great spot for a THEME PARK! Puke, puke!

RAAAY says on Feb 22, 2008, 15:19:

Tejas..........as you know, I predicted that they would increase the rate ................mostly because I'm just so f**kin clever..................

Look for $1 - 1865 by Wednesday....................

.........Its useless to argue with ignorance

rocinante says on Feb 22, 2008, 15:20:

"Colombia's benchmark overnight lending rate of 9.5 percent is 6.5 percentage points above the main U.S. rate, the widest gap since January 2002. The yield differential has attracted investors to Colombia's bonds, helping drive up the peso 6 percent this year, the second-biggest gain after the Chilean peso among 26 emerging-market currencies tracked by Bloomberg.

``The widening spread continues to be a central player in strengthening currencies in the region,'' said Bertrand Delgado, a Latin America economist at IDEAglobal Inc., a New York-based research firm. ``Colombia's central bank will need to lift rates to contain inflation expectations.''

The peso advanced 0.1 percent to 1,903.95 per dollar at 1:48 P.m. in New York from 1,906.35 on Feb. 15, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. The peso touched 1,883 today, the highest since June 20.

Economists this month raised their median forecast for 2008 inflation to 4.85 percent from 4.62 percent the prior month, according to a central bank survey. The annual inflation rate jumped to 6 percent in January, exceeding the central bank's 3.5 percent to 4.5 percent annual target range.

Six of 19 economists surveyed by Bloomberg predict central bankers will raise the benchmark rate to 9.75 percent when they meet on Feb. 22. The remainder forecast no change in rates."

The other 13 analysts had roast beef and this little piggy had none.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

durito says on Feb 22, 2008, 15:22:

"it's scary when even the experts are wrong."

the thing about economists and other market predictors is that they are wrong a lot more than they are right. i don't actually thing their jobs are that hard, it's just that they work in industries where they are pressured to issue predictions that are in line with everyone else. that leads to things like bunches of subprime mortgages rated AAA.

"The dollar will never see 2100 COP again and I doubt 2000."

Would you offer odds on this?

tejasmarcos says on Feb 22, 2008, 15:25:

i'll take some of that action! what ya say, RAAY?

trying to walk a straight line on sour mash and cheap wine...

rocinante says on Feb 22, 2008, 15:27:

Make me an offer on this bet that has no end. How far do you want to go out? Until I'm 90? Our $5 will be worthless by then, after inflation and depreciation.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

RAAAY says on Feb 22, 2008, 15:28:

Im sticking to a much earlier prediction............

... " RAAAY says on Friday August 24th, 2007 9:16: edit
................................The peso will maintain a nice steady 1500 to the dollar..............although it will probably take another 12 months to find that level..........."

.........Its useless to argue with ignorance

durito says on Feb 22, 2008, 15:37:

No offense at all, I was just interested in seeing what odds you thought were applicable.

It's not the kind of market I have enough of an understanding of to set an accurate price, but it is the kind of idea of what I do for a living.

Give me a # and an expiration date if you choose, I'll give you my thoughts.

rocinante says on Feb 22, 2008, 15:40:

I'll give you 12 months and lets split the difference between 2000 and 2100 - 2050

The peso does not CLOSE above 2050 between now and Feb 22 2009.

The stakes? Zuccini. (Bill Murray "Meatballs")

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

durito says on Feb 22, 2008, 15:43:

Even Money?

I'll take you up on that for sure.

rocinante says on Feb 22, 2008, 15:52:

$20 USD payable via paypal?

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

durito says on Feb 22, 2008, 15:57:

You live in Medellin, right?

How about a good lunch somewhere on the loser's behalf?

rocinante says on Feb 22, 2008, 16:08:

Done.

Someone please copy our posts under a different name so no future edits can take place.

"rocinante says on Friday February 22nd, 2008 15:40: edit

The peso does not CLOSE above 2050 between now and Feb 22 2009.

The stakes? Zuccini. (Bill Murray "Meatballs")

durito says on Friday February 22nd, 2008 15:43:

Even Money?

I'll take you up on that for sure.

durito says on Friday February 22nd, 2008 15:57:

You live in Medellin, right?

How about a good lunch somewhere on the loser's behalf?"

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

durito says on Feb 22, 2008, 16:23:

Well I didn't make any real analysis on this, but my word is good.

Honestly I have very little idea where the peso actually goes, though I certainly hope I can get a few more when I buy a place here later this year. To me though, even money sound like a good bet.

I'll be around here for sure. If you'd like to have a lunch or something before that let me know.

cheers

tasco66 says on Feb 22, 2008, 17:17:

"Colombia's peso has appreciated 54 percent in five years"

That says it all

Bravo, Presidente Uribe for the perfect operation!

RAAAY says on Feb 22, 2008, 17:19:

it does...???

What does it say..??

.........Its useless to argue with ignorance

durito says on Feb 22, 2008, 17:22:

""Colombia's peso has appreciated 54 percent in five years"

That says it all"

What does that say though?

The NASDAQ appreciated from approx 1,000 in 1995 to 5,000 in 2000. 8 years later it closed today at 2,300.

rocinante says on Feb 22, 2008, 17:23:

To me it says "Respect the Trend as nothing has changed" . Tasco surely means the same with his vague, "take it both ways" comment.

Exports are 18% of GDP - Helen Murphy said so. Who's the knucklehead last week saying 40% and what happened to my girl Andrea?

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

tasco66 says on Feb 22, 2008, 17:36:

losing over 50% of its value in 5 years means means that the US dollar is becoming a worthless piece of paper

Bravo, Presidente Uribe for the perfect operation!

durito says on Feb 22, 2008, 17:38:

Perhaps, but lots of currencies, commodities, real estate, bonds, stocks, etc have lots 50% of their value at one time or another only to recover quite nicely.

I'm not suggesting this will happen, just pointing out that the sky might not actually be falling.

tasco66 says on Feb 22, 2008, 17:39:

"The NASDAQ appreciated from approx 1,000 in 1995 to 5,000 in 2000. 8 years later it closed today at 2,300."

There are fundamentals supporting the rise of the Peso, there were no fundamentals supporting the rise of the NASDAQ, just money losing internet companies

Bravo, Presidente Uribe for the perfect operation!

tasco66 says on Feb 22, 2008, 17:43:

I only see the US dollar going down:

http://finance.yahoo.com/q/bc?s=USDEUR=X&t=5y

http://finance.yahoo.com/q/bc?s=USDCHF=X&t=5y

http://finance.yahoo.com/q/bc?s=USDGBP=X&t=5y

http://finance.yahoo.com/q/bc?s=USDCAD=X&t=5y

http://finance.yahoo.com/q/bc?s=USDAUD=X&t=5y

Bravo, Presidente Uribe for the perfect operation!

tasco66 says on Feb 22, 2008, 17:46:

If you want to see why the US dollar is going dowm have a look at this web site:

http://www.babylontoday.com/national_debt_clock.htm

Bravo, Presidente Uribe for the perfect operation!

durito says on Feb 22, 2008, 17:52:

I'm not saying it won't keep going down. Just pointing out some things.

I assume then, that you have 0% of your assets in the US dollar?

rocinante says on Feb 22, 2008, 17:53:

Agreed. Colombia needs a disaster or the US needs to sky rocket its economy in order to reverse the trend towards the proper rate. JMHO

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

durito says on Feb 22, 2008, 18:06:

Well, if history suggests anything, Colombia will in fact have a economic disaster shortly.

Personally, I think their fundamentals have improved and it won't be a disaster -- but there will certainly be a correction.

wendell13 says on Feb 22, 2008, 18:11:

The Colombian peso has not increased 54% against the dollar in the last five years. A dollar high of about 3000 to 1900 does not equate to 54%. More like 37%.

According to CIA world fact book exports are approximately 24% of the Colombian economy.

rocinante says on Feb 22, 2008, 18:25:

I'd email Mike Bloomberg right now if I were you Wendell. How his multi billion dollar staff could print such rubbish is beyond me!

By the way how old is the CIA fact book and that figure looks to be ALL Colombian exports - not just to the US.

Durito. This IS the long awaited correction. You are witnessing it now. Or should I say an overdue lagging correction.

If you are hoping for a stronger dollar because you are paid in green backs... buy options or make bets that win you money if the peso continues to gain. This way if the dollar comes back to 2500 you are worth more and gladly pay the losing wager, not a problem - if the dollar continues to get crushed you win on the options or the bet.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

wendell13 says on Feb 22, 2008, 18:34:

Those export figures were for 2007 estimated by the CIA. Yes, that is total exports

The problems with buying options is that they are a decaying asset. You can spend a lot of premium buying puts on the dollar and if your timing is off, it can be costly. If the market goes sideways or goes up, or down just a little, you lose.

You could sell naked calls but that is too risky for my blood.

fecherklyn says on Feb 24, 2008, 17:38:

Some statistics have been submitted in these posts ...and then challenged. I also follow these exchange rates and found the following:

Recent US$ high (over last 7 years) against C. Peso = 3,415 on June 5th 2003.

Latest rate (22/02/2008) = 2,816 = - 17.5% down from 5/06/2003 high.

Recent US$ low (over last 7 years) against C. Peso = 2,534 on 6/06/2007 = -25.8% down on 5/06/2003 high.

These are not 50% differences but they are HIGHLY significant.

Sorry I am too late to get a piece of this action but I also doubt any MATERIAL correction in the short/medium term of the US$ against the C. Peso.

Classroom economics have mainly taught us that in the event of "hard times" (recession or feeble economic growth) there will be a flight of capital from emergent economies. To my mind, this economic theory was soundly based on historic reality UNTIL globalisation and latter-day developped nations governmental policy to pursue "cheap money"policies.

As a consequence, I feel the viability of this old economic "law" is now severely compromised. The differentials on interest rates for currencies competing in the currency markets has now become a more important factor.

Who has the better prospects for economic growth over the short/medium term? The USA or Colombia?

Who offers the most attractive rates for the "carry trade" and possessors of currency liquidities? The USA or Colombia?

Sure, Colombian trade may suffer from weak economic growth, especially from its main trading partner, but it still has much to offer.

tomtom33 says on Feb 25, 2008, 01:11:

Fech, you have some typos there or horrid info.

From my very imperfect memory, the COP high vs USD was in the first part of 2003. That high was around 3000. The current rate is around 1900. Wendell is right on. There is no disagreement over the past.

The problem with Bloomies is that they looked at 1900 and 3000 the wrong way. An increase from 1900 to 3000 is a 58% increase(1100/1900). But a decrease from 3000 to 1900 is a 37% decrease(1100/3000).

I have no idea where anything is going.

fecherklyn says on Feb 25, 2008, 05:00:

Tomtom,

Well spotted, I took the Euro/Peso rates by mistake.

The US$/Peso rates (over period 01/01/2000 to 22/02/2008) were:

US$/Peso high on 21/03/2003 = 3079

US$/Peso on 22/02/2008 = 1897 = -38.4% from 21/03/2003 high.

US$/Peso low on 6/06/2007 = 1875 = -39.1% from 21/03/2003 high.

Source: http://fxtop.com (Official prices published by European Central Bank).

rocinante says on Feb 25, 2008, 05:15:

54% is spot on:

"The problem with Bloomies is that they looked at 1900 and 3000 the wrong way. An increase from 1900 to 3000 is a 58% increase(1100/1900). But a decrease from 3000 to 1900 is a 37% decrease(1100/3000)." tomtom

The wrong way? They wrote the article! Your math is great tomtom but you need to read a little slower. All of you.

Bloomberg reporter Helen Murphy and her info are correct. The key being the word "APPRECIATED" in the sentence:

"Colombia's peso has appreciated 54 percent in five years"

math=1025/1895

C'mon guys, not everyone is looking from the dollar's perspective.

"World economic indicators point to a democrat winning 2008. It will surely be Obama. Peso 1400 by November" Feb 5, 2008

tomtom33 says on Feb 25, 2008, 06:29:

You are so correct, Roci. I fuck up on a regular basis.