Colombia’s central bank left its key interest rate on hold Friday and revamped its tools to intervene in the foreign exchange market in an attempt to avoid volatility in the exchange rate.
The central bank announced that it was ending a year-long dollar buying program that consisted of $20 million daily purchases in the spot market, a measure designed to drain U.S. currency and ease the peso’s strength against the greenback. The peso weakened sharply in September, making the purchases unnecessary.
The central bank will now instead use auctions to prevent excessive volatility in the exchange rate. It will auction $200 million if the peso moves 2% or more from its ten day average.
The decision to auction dollars was necessary “because of the recent behavior of the exchange market and the uncertainty in the international economy,” said central bank chairman Jose Dario Uribe. The peso ended Friday at its weakest level against the dollar so far this year and retreated nearly 8.5% in September.
Before September the peso had gained 8% against the dollar despite the central bank’s dollar purchases, and its strength represented a burden on Colombia’s exporters, as it makes their products more expensive abroad.
But as Europe’s debt problems grew this month and the Federal Reserve provided a gloomy outlook on the U.S. economy, markets took a beating, and Colombia’s currency made a 180-degree turnaround. Throughout September it gave up all its gains from the previous eight months, and closed Friday at COP1,930 for $1, near to where it ended 2010.
Analysts were expecting the central bank’s decision to hold and let its dollar buying program expire. The auction plan was not widely expected by the market.
This is the second straight month that the central bank has left its benchmark interest rate steady at 4.5%, after increasing the rate the six previous months. It cited concerns of a global economic downturn that reduced the need to implement higher borrowing costs.
Beyond the bank’s worries regarding the global economic outlook, the decision by its seven-member board also reflects fewer concerns over inflation. The trailing 12-month consumer price index through August was 3.27%, well within the bank’s target range of 2% to 4% for this year, and the last month’s CPI saw a 0.03% decline.
“Inflation expectations have not changed,” Uribe said.