Colombia’s Consumer Price Index (CPI) rose 5.84% year on year in May, undershooting the market consensus of 5.91%. The release points to slightly softer inflation momentum than forecast over the period.
The gap between the actual reading and expectations was 0.07 percentage point. The CPI print provides an updated gauge of price pressures in the Colombian economy and will feed into near-term assessments of inflation trends.
Implications For Monetary Policy And Market Positioning
The lower-than-expected inflation reading of 5.84% for May reinforces our view that the central bank will continue its monetary easing cycle. This print suggests disinflation is proceeding faster than anticipated, giving policymakers more justification to cut rates at their upcoming meeting. We see this as a clear signal to position for lower interest rates in Colombia.
Given this data, we believe the Colombian Peso is likely to weaken against the U.S. dollar in the near term. We are looking to buy USD/COP call options with expirations in late July, targeting a move towards 4,250. Current market pricing now implies a greater than 80% chance of a 50 basis point cut later this month, which would further pressure the peso.
Opportunities And Risks In Local Markets
We also see an opportunity in the local rates market, specifically by receiving the fixed rate on IBR swaps maturing in the next 6 to 12 months. The market has not fully priced in the potential for a more aggressive series of cuts now that inflation is clearly trending down. Historically, the front end of the yield curve has rallied significantly when inflation has surprised to the downside during an easing cycle.
For equities, this environment is supportive for the MSCI COLCAP index, as lower borrowing costs should benefit local companies. We are considering call options on the index, as it has gained over 4% since the last rate cut in April and this news should provide further momentum. Rate-sensitive sectors like financials and utilities are likely to outperform.
However, we must watch for any hawkish commentary from central bank members, as the 5.84% inflation rate is still considerably above their 3% target. Furthermore, a sudden drop in oil prices, a key export, or a shift in global risk sentiment could quickly reverse any peso weakness. These external factors remain a primary risk to our positions.
