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Peso 9 year high, Interest difference 7.75 highest in 7 years

Colombia's Peso Touches Nine-Year High on Rate Rise Speculation

By Andrea Jaramillo

June 16 (Bloomberg) -- Colombia's peso rose to a nine-year high on speculation the central bank will lift its key lending rate this week to curb inflation.

``Rising prices of oil and other basic goods such as wheat are feeding into expectations the central bank will raise rates this week,'' said Alvaro Camaro, chief analyst at Stanford Financial Group's unit in Bogota.

The peso gained 1.4 percent to 1,678 per U.S. dollar at 4:01 p.m. New York time, from 1,702.2 on June 13, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. It earlier touched 1,675.15 per dollar, its strongest since June 1999.

Increased foreign direct investment and the widening gap between Colombian and U.S. benchmark interest rates have fueled an 18.2 percent rally in the peso this year, the biggest advance among 26 emerging-market currencies tracked by Bloomberg. The 7.75 percentage point difference between Colombian and U.S. benchmark rates is the widest since July 2001.

Banco de la Republica will increase its overnight lending rate by a quarter-percentage point to 10 percent on June 20, according to 10 of 18 economists surveyed by Bloomberg. The other eight analysts forecast policy makers will leave the rate unchanged at 9.75 percent, its highest level since August 2001.

Crude oil touched a record $139.89 a barrel in New York today, adding to concern of quickening inflation. Economists raised their median forecast for 2008 inflation in Colombia to 5.97 percent from 5.29 percent the prior month, according to central bank survey released June 10. That rate exceeds the central bank's 3.5 percent to 4.5 percent target range.

`Holding Back'

``We sense that a strong peso is a factor holding back Banco de la Republica from further monetary tightening,'' Boris Segura, an economist at Morgan Stanley in New York, wrote in a report today. ``If Banco de la Republica does not bring inflation decisively under control, we fear inflation expectations could become unhinged and the central bank could be forced to execute a stronger monetary response down the road.''

A truckers' strike that began today to protest rising oil prices and an oversupply of cargo services is adding to inflation concerns, Camaro said.

Transport Minister Andres Uriel Gallego said in an interview with W Radio that movement in most of Colombia's roads is ``normal'' with some reduction in cargo moving from Buenaventura, the nation's biggest port. Truckers are to meet with President Alvaro Uribe tonight.

New Finance Minister

``Although we aren't seeing a big impact yet, the risk is that the strike will drag on, leading to shortages,'' Camaro said.

The yield on Colombia's benchmark 11 percent government bonds due July 2020 fell 4 basis points, or 0.04 percentage point, to 11.98 percent, according to Colombia's stock exchange. The bond's price rose 0.253 centavo to 93.867 centavos per pesos.

By BillBigD on Jun 16, 2008, 21:17 in Friendly Talkzone.

Buongone says on Jun 16, 2008, 21:30:

Bad news !!

0 funny, 0 helpful.

GregYohn says on Jun 17, 2008, 07:53:

Hola!

After more than 1 yr in a IRA....just made less than 2% interest, not including the drop in the US Dollar! I say the Colombian government bonds will beat my terrible return!

12VOIP.com gives free calls to Colombia.Greg

0 funny, 0 helpful.

tigredelnorte2 says on Jun 17, 2008, 08:05:

You can buy a 2 year Certificate of Deposit from a bank in Colombia that pays 9.33%. I say it just a few days ago.

0 funny, 0 helpful.