Colombia Central Bank May Ignore Pressure by President and Increase Rates

[Judi Lynn]

Colombia Central Bank May Ignore Pressure by President and Increase Rates
By Andrea Jaramillo and Helen Murphy - Jun 17, 2011 9:09 AM CT

Traders are betting Colombia’s central bank will raise the benchmark interest rate to as high as 5 percent by year-end, ignoring President Juan Manuel Santos call for policy makers to pause and preserve growth.

The yield on Colombia’s benchmark short-term bond due August 2012 has risen 29 basis points to 5.27 percent since Santos on May 31 made what he called a “respectful request” for policy makers to keep the key rate on hold at 4 percent. The gap between yields on the securities due 2012 and the nation’s bonds due 2024 shows that borrowing costs need to rise further to control inflation that breached the 3 percent midpoint of the bank’s target range in May, according to Interbolsa SA’s Pedro Ospina.

The additional tightening will begin today, when Banco de la Republica is expected to raise the overnight rate by a quarter point for the fifth straight meeting to 4.25 percent, according to 22 of 23 economists surveyed by Bloomberg. That’s likely to anger businesses on concern growth will slow and also exporters who say higher rates attract more investment behind the peso’s 6.7 percent rally this year.

“Independently of what Santos says, the bank will continue to lift” rates, said Ospina, a fixed-income analyst at Colombia’s biggest brokerage. “Santos’s remark is entirely political. He wants to appease businesses and distance himself from what some see as an unpopular decision.”

More:
http://www.bloomberg.com/news/2011-06-17/colombia-s-bank-may-ignore-pressure-by-santos-and-raise-rates.html