The Colombian peso extended its losses on Tuesday, becoming the worst-performing currency among emerging markets for the second consecutive day. The currency fell 1.2%, bringing its total decline to 2.8% so far this week, driven by expectations of faster interest rate cuts by the country’s central bank.
The slump came after inflation data released on Friday showed a sharper-than-expected slowdown in annual inflation, dropping to 6.12%, below all 23 analyst forecasts compiled by Bloomberg. This weaker inflation reading has fueled speculation that Colombia’s central bank may accelerate rate cuts to stimulate the economy, diminishing the peso’s appeal for international investors, particularly carry traders who profit from interest rate differentials.
“The inflation figure was a key factor that led international investors to adjust their stance on the peso, due to the likelihood of more aggressive rate cuts,” said Jose Joaquin Prieto Jaramillo, business head at BTG Pactual.
BBVA analysts forecast that the central bank may opt for a 75-basis-point cut during its upcoming meeting on September 30, up from the 50-basis-point reductions seen in recent months. Colombia’s central bank has already lowered interest rates from 13.25% to 10.75% since December, as policymakers aim to balance inflation control with economic growth.
President Gustavo Petro has echoed calls for more aggressive monetary easing, arguing that there is no justification to delay further rate cuts given the slowing inflation. The central bank’s decision later this month will be closely watched, as further cuts could lead to continued pressure on the peso.
With global investors seeking higher yields, the potential for deeper rate cuts is making the peso less attractive, raising questions about the broader economic outlook for Colombia.
