The Colombian peso strengthened sharply against the dollar Tuesday as traders and investors respond to the central bank’s decision a day earlier to unexpectedly hike its benchmark rate by 25 basis points.
The peso gained early Tuesday to COP1,798.35 to the dollar from COP1,818.00 a day earlier. The local foreign exchange market was closed Monday when the central bank unveiled its decision to hike its key rate to 5%.
Colombia’s largest business groups and export federations had called on the central bank to keep its key rate in check on worries that a higher rate would prompt more foreign investors to come into the country to profit from the rate differential between Colombia and the U.S.
The central bank, however, shrugged off those concerns and said that the rate hike was necessary to cool off inflation, which stood at 3.7% for all of 2011.
Finance Minister Juan Carlos Echeverry said Monday after the central bank’s rate announcement that the government aimed to stem strong gains in Colombia’s currency by delaying repatriation of about $2.2 billion in dollar profits that Colombia earns from its oil and commodity sales abroad.
Echeverry said that of that amount, $1 billion pertain to dividends from oil profits by national oil company Ecopetrol, while $1.2 billion are royalties from mining and oil.
Before Tuesday’s gains, the peso had appreciated nearly 7% against the dollar in January.