(Bloomberg) -- Colombia’s swap rates surged across the curve following a surprisingly large minimum wage increase that added to expectations that the central bank will further slow down the pace of interest rate cuts.
Ten-year swaps rose by 24 basis points to 9.32% on Thursday, the highest level since October 2023, according to data compiled by Bloomberg. In a speech on Christmas eve, President Gustavo Petro announced that Colombia’s base salary would increase 9.5% next year, more than double economists’ expectations for inflation in 2025.
The leftist leader ignored warnings from the central bank about the potential impact of such a steep increase, especially since prices for many services are linked to minimum wage adjustments or the previous year’s inflation rate.
Brazil Inspires Caution
The central bank unexpectedly slowed its monetary easing campaign last week, citing tighter global financial conditions, the impact of a weaker peso on domestic prices and uncertainties surrounding public finances. Its latest inflation estimate for 2025 is 3%, considering a minimum wage increase of about 6%.
“The minimum wage rise will put pressure on prices in the first half of the year,” David Cubides, chief economist at Alianza Valores, said via phone. “The December decision is making us reassess our estimates regarding the path of interest rate cuts.”
Cubides now expects the central bank to lower interest rates to 7% by 2025, up from a previous estimate of 6.25%. The benchmark rate currently stands at 9.5%.
However, some economists worry the central bank may adopt a more dovish stance once Petro appoints a majority of its board members early next year.
Investors are increasingly concerned that Colombia could face a fiscal and market crises similar to those of its neighbor Brazil, as Petro’s spending plans bring about significant budget deficits just as tax revenue falls.
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