The peso rose as much as 1.3 percent today following a June 1 report that showed the monthly inflation rate soared to 0.93 percent in May, more than double the 0.4 percent median forecast in a Bloomberg survey of economists. Colombian markets were closed yesterday for a national holiday.”There’s no question we’ve got an inflationary problem,” said Felipe Campos, an analyst at Bogota-based brokerage firm Alianza Valores. Expectations central bankers “will raise rates in the next meeting are helping the peso soar because of the yield differential” between U.S. and Colombian rates.The peso gained 1 percent to 1,728.9 per U.S. dollar at 2:04 p.m. New York time, from 1,747 on May 30, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. The currency earlier reached 1,725.15, the strongest since June 30, 1999.Increased foreign direct investment and the widening gap between U.S. and Colombian benchmark rates have fueled a 16.7 percent rally in the peso this year, the second-biggest advance, after the Slovakian koruna, among 26 emerging-market currencies tracked by Bloomberg. The 7.75 percentage point difference between U.S. and Colombian benchmark rates is the widest since July 2001.Banco de la Republica last month left the key rate at a six-year high of 9.75 percent. Campos forecasts the bank will raise the key rate to 10 percent at its June 27 meeting, leaving it there through year-end.Colombian Finance Minister Oscar Ivan Zuluaga said in an interview with Bogota-based La Republica newspaper that a peso that strengthened to 1,500 per dollar would be “catastrophic” for the economy, and the government is ready to take measures to stem appreciation.In a bid to slow a five-year, 65 percent rally in the peso that has crimped profits for flower and banana exporters, the government last week announced new measures to strengthen capital controls.The government raised deposit requirements on new portfolio investment in the country, such as the purchase of bonds and stocks, to 50 percent from 40 percent. Multinationals will also be required to keep foreign direct investment in Colombia for a minimum of two years, the Finance Ministry said in a May 30 statement.Bond yields soared as investors increased bets on higher rates. The yield on benchmark 11 percent government bonds due July 2020 rose 31 basis points, or 0.31 percentage point, to 11.69 percent, according to Colombia’s stock exchange. The bonds’ price dropped the most since Jan. 21, falling 1.889 centavo to 95.595 centavos per peso.Colombia’s annual inflation rate jumped to a four-year high of 6.4 percent in May, exceeding the central bank’s 3.5 percent to 4.5 percent inflation target range.”Investors are demanding higher returns on fixed-rate bonds as inflation eats into profits,” said Eduardo Reyes, chief economist at Tradition brokerage’s unit in Colombia. (Bloomberg)
