Colombia’s central bank is to double US dollar purchases to control an appreciating peso, which is damaging exports, reported local media.
Colombia’s Treasury and central bank will double their coordinated purchase of US dollars to reach $2 billion for July-September. Extending the purchasing program is necessary to “correct” the peso’s continuing appreciation over the next three months, said Finance Minister Mauricio Cardenas, quoted by US news service Bloomberg.
By releasing more Colombian pesos into the global money market and using funds to buy dollars, the central bank appears to be moving to weaken the peso’s position against the dollar. This is purportedly designed to keep the peso low so that exports originating in Colombia are more competitive globally.
In the same announcement on Friday, the bank said it would lift the official interest rate to 4%, in the third hike in as many months.
Growth higher than expected
The announcement from the Bank’s governor followed the release of higher-than-expected first quarter growth figures last Thursday. This is seemingly in keeping with the bank’s strategy to withdraw stimulus to the rapidly-growing Colombian economy and to prevent overheating.
Colombia’s economy grew 6.4% in the first quarter of 2014, marking the fastest expansion in any quarter since 2010, according to data released by the country’s national statistics agency on Thursday.
“First quarter growth figures (of 6.4%) were higher than the board expected. This has its implications and gives us reason to raise the interest rate by a quarter percentage point,” Banco de la Republica governor Jose Dario Uribe announced, reported in Colombia’s El Espectador newspaper.
Robust economic growth in the first quarter cemented Colombia’s position as South America’s fastest growing economy, with major Latin American neighbors Brazil and Chile reporting only 1.9% and 2.6% growth in the same period, respectively, according to US wire service, Bloomberg.
Growth was pushed particularly by the Colombian construction industry, which recorded a 17.2% expansion compared to the first three months of last year.
Economy close to full capacity
The central bank will raise its policy rate to 5.25% by the end of next year as the economy closes in on full capacity following rapid expansion, said Juana Tellez, chief economist at BBVA Colombia, as reported by Bloomberg.
“There are demand pressures, and this is why inflation has been gaining speed. The central bank has to react to these pressures to prevent inflation from exceeding its target range,” Tellez told Bloomberg on Friday.
Central bank rate hikes generally make it more expensive to borrow money, leaving people less likely to spend freely. This consequently limits the rate of inflation, the increase in price of goods and services over time.
Inflation picks up
Latest inflation figures picked up to 2.9%, the highest rate since 2012, in May. The jump puts Colombia on course to exceed its 3% target by the end of the year, but to remain within its 2-4% range, reported Bloomberg. Colombia still remains the only Latin American economy to face the prospect of below-target inflation.
Presidential elections, which saw incumbent Juan Manuel Santos re-elected for a second term, will mean the continuation of peace talks with Colombia’s largest rebel groups, the resolution of which could cement Colombia’s “Asian” rates of growth according to President Santos, said reports by Bloomberg.