Traders are increasing bets that Colombia will reduce interest rates this month to the lowest in Latin America, after some policy makers voted for bigger cuts in December and the inflation rate fell to a two-year low.
Growing bets Colombia will miss its inflation target for the first time since 2008 are a signal to Citigroup Inc. and Corp. Financiera Colombiana SA that traders are overestimating how much floods will push up food prices.
Colombia’s peso bonds dropped, pushing yields to their highest level this month, on speculation the government may issue more local debt to finance increased spending after higher-than-average rainfall left thousands homeless and destroyed roads in the South American country.
Betting on gains in the Colombian peso has proven to be the most profitable risk-adjusted trade in the foreign-exchange market this year as policy makers raise interest rates to keep inflation in check.
Colombia’s central bank raised borrowing costs for a second straight month in a bid to stabilize the fastest economic growth since 2006 and slow inflation toward the mid-point of policy makers’ target amid a surge in lending.