Chilean Peso Advances After Rate Cut; Colombian Bonds Gain

By Drew Benson

March 13 (Bloomberg) -- Chile’s peso rose to a two-week high after the central bank cut its benchmark interest rate by an unexpected 2.5 percentage points in a bid to shore up the economy.

The currency gained for a fourth straight day, adding 0.5 percent to 594.15 per dollar at 10:02 a.m. New York time, from 597.25 yesterday. It touched 592.45, the strongest since Feb. 24. The peso has risen 2.2 percent this week.

“The monetary policy response has been aggressive as the central bank shows it will do all it can to support economic activity,” said Alberto Ramos, an economist at Goldman Sachs Group Inc., in a telephone interview from New York. “That offsets the fact that the interest-rate differential is less attractive now.”

The peso has been buoyed by government plans to sell $50 million a day in the local spot market to fund an economic stimulus plan, Ramos added. The government plans to draw $4 billion from a $20.2 billion stabilization fund that it stockpiled during a six-year rally in copper, of which the nation is the world’s biggest producer.

Chile’s economy, which shrank 1.4 percent in the 12 months through January, is slowing as demand for exports slumps. Copper prices have dropped more than 40 percent in the past six months.

Two Percentage Points

Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Private lenders have started to pass on lower rates to borrowers, cutting 2 percentage points from the average cost of consumer loans, central bank economists wrote in a report to the policy-making committee.

Central bank policy makers raised rates five times in 2008 to a decade-high of 8.25 percent as climbing commodity prices pushed annual inflation up to a 14-year high of 9.9 percent in October. They have cut 6 percentage points in three months.

The annual rate of inflation slowed to 5.5 percent last month as the cost of fuel and financial services dropped.

The yield for a basket of Chile’s five-year, fixed-rate peso bonds dropped 11 basis points, or 0.11 percentage point, to 3.3 percent, according to Bloomberg prices.

In Colombia, the yield on Colombia’s benchmark 11 percent bonds due in July 2020 slid for a fourth straight day, declining seven basis points, or 0.07 percentage point, to 9.59 percent, according to Colombia’s stock exchange. The yield is down 7 basis points this week.

Central bank policymakers are expected to lower the key lending rate at a slower pace when they next meet on March 20, JPMorgan Chase & Co. said in a report yesterday.

‘Turning more Dovish’

“The Colombian central bank appears to be turning more dovish with a recent 100 basis point cut and two new board members who are close to the Finance Ministry, which has been calling for aggressive easing,” the report said. JPMorgan expects policymakers to cut the overnight rate by 75 basis points next week and by 50 basis points, to 6.75 percent, in April.

Last month, the central bank cut the key lending rate for a third month to 8 percent from 9 percent.

Colombia’s peso climbed 0.9 percent to 2,442.15 per dollar.

Argentina’s peso was little changed at 3.6455 per dollar, from 3.6451 yesterday. The currency is down 0.2 percent this week.

The yield on the country’s inflation-linked peso bonds due in December 2033 climbed one basis point to 20.86 percent, according to Bloomberg data.

To contact the reporters on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net