Colombia’s central bank does not rule out the possibility of “big” interventions in the foreign exchange market to control the strength of the local peso currency, central bank chief Jose Dario Uribe said on Friday.
“The fact that these interventions have not worked in the past does not mean that they might not work in the future. In fact, we do not discard the possibility of big interventions,” Uribe said in televised remarks.
The central bank is buying at least $20 million per day in a program, scheduled to last until mid-March, meant to take some of the juice out of the local currency. Since the year began, the peso has climbed 11 percent against the U.S. dollar to 1,821 per greenback.
Friday’s comment was the first in which Uribe, usually known for using measured language, spoke of “big interventions.” But local market players did not read the comment as indicating an immediate increase in dollar purchases.
“I am betting that the bank will continue relying on verbal interventions such as this one,” said Daniel Velandia, chief economist at Bogota brokerage Correval.
“He is making the point that they are serious about controlling the peso and reaffirming that while $20 million per day is the minimum, that minimum could be raised, if necessary,” Velandia said.
Policymakers worldwide are moving to keep their currencies from strengthening as investors — turning their backs on low interest rates in developed economies — pour money into higher-yielding emerging markets. The measures have been wide ranging.
The waters of the debate have been muddied by the Federal Reserve’s decision, announced this week, to buy $600 billion in long-term bonds with new money in an effort to revive the flagging U.S. economy.
Brazil, warning of a “currency war,” criticized the U.S. plan and has raised taxes on foreigners buying local bonds for the second time since the start of October.
Policymakers in Bogota have avoided imposing capital controls as they campaign for Colombia to win back the investment-grade credit rating that the country lost in an economic crisis 10 years ago.
But political pressure to ease the peso’s rise remains strong. And Colombian businesses that sell their products overseas are clamoring for policymakers to do more.
Exporters who get paid in dollars while having to pay their costs in pesos say they are being forced to lay off workers as profits shrink along with the once-strong dollar.
Colombia’s inflation rate has a “high probability” of being under 3 percent this year, Uribe also said on Friday.
The bank’s target range for inflation this year is between 2 percent and 4 percent.
“We see a high probability that inflation will be under 3 percent this year,” Uribe said. “Why will we have inflation under 3 percent? For the appreciation of the peso, because the economy has excess capacity and due to the close of trade with Venezuela.”
Venezuela has shut off trade with neighboring Colombia as part of a diplomatic spat over Bogota’s close military alliance with Washington. The border’s closing has slowed Colombia’s recovery from the 2008-09 world crisis.
Colombia expects its economy to expand 4.5 percent this year and in 2011. Uribe said Colombia’s inflation rate will be within the official target range.
“Our technical team is projecting an inflation rate not very far from 2 percent in the year ahead,” Uribe said.
The bank’s official inflation projection for 2011 is between 1.8 percent and 3 percent. (Hugh Bronstein / Reuters)
