Colombia’s central bank lowered benchmark interest rates to the lowest level in Latin America in an attempt to slow down the rising peso, something one board member on Wednesday said they might be unable to do.
Juan Jose Echavarria, one of the central bank’s seven board members, said that the bank, which has slashed rates in its last three meetings, might not be able to reverse the upward trend of the peso over the next five years.
A rising peso has been a thorn in the side of Colombian monetary policy makers as its skyrocketing trajectory has resulted in several far-reaching and severe ramifications in a variety of industries — most notably for the country’s coffee producers.
The central bank on Monday increased its daily dollar purchases to at least $30 million between February and May — representing a $10 million increase. The bank is now reportedly expected to spend at least $3 billion in total.
Echavarria argued that the trouble with the country’s currency stemmed from “fiscal deficits, savings problems, and ‘Dutch Disease.'” The term Dutch Disease refers to a condition when a boom in natural resources, in this case Colombia’s mining and oil sectors, causes the local currency to strengthen and therefore erode profits for manufacturers. Foreign investment in Colombia’s oil and mining sectors exceeded $13.1 billion in 2012 — an 8.4% increase from 2011.
“I do believe in Colombia there is a complicated exchange rate problem that doesn’t have to do with the central bank,” said Echavarria. “The central bank cannot change the exchange rate in the next five years…One can have a stabilization strategy for the exchange rate that can be really effective, but changing the long-term level is almost impossible.”
The onset of Dutch Disease and the subsequent rise in the peso is in large part due to the overall success of the Colombian economy. A balanced budget, low fiscal deficits, a neoliberal economic policy, and more than anything, increased security, have made Colombia an extremely attractive option for foreign investors. The influx of dollars has played a large role in the peso’s unfortunate strength. President Juan Manuel Santos has already requested that state-run oil giant Ecopetrol “not take on dollar debt for financing.”
“What’s happening? GDP is growing below its potential. That gives reason to lower rates. Inflation is below the target, that gives a reason to lower rates…The only thing that tangles the story a bit is that there are fears that credit is still growing at high rates [and] housing prices continue to rise more than other prices,” said Echavarria.
The blunt board member’s term is set to end in February after the next central bank meeting.