Colombia’s peso climbed the most in three months after the Central Bank said it has no “imminent” plans to buy dollars in the foreign-exchange market, resisting pressure to stem the world’s biggest currency rally this year.
Central bank chief Jose Dario Uribe said August 20 that Banco de la Republica will buy dollars in the spot market to ease gains in the peso when it deems it “appropriate” to do so. The lender decided against purchasing the U.S. currency after President Juan Manuel Santos earlier this month said he would seek to persuade policy makers to be “more creative, more bold” in stemming gains in the currency.
Banco de la Republica “surprised by not announcing any concrete measures,” Barclays Capital analysts Roberto Melzi and Jimena Zuniga wrote in an August 20 report. “Participants had braced themselves for relatively meaningful announcements.”
The peso jumped 1.2% to 1,798.96 per dollar at 10:04AM New York time from 1,820 on August 20. It had dropped 0.7% in the three days ahead of the Central Bank’s monetary policy meeting. The peso’s 14% jump this year is the biggest among all currencies tracked by Bloomberg.
The currency’s “very strong” appreciation this year is a result of increased dollar inflows amid higher prices for the nation’s exports of oil, coal and coffee, as the government sells its dollars in the market and as foreign investors view the country as more attractive, Uribe said.
He said that while the Central Bank has “ample” capacity to intervene, policy makers also analyzed different tools the bank could use to take pesos out of the economy so that “should the bank intervene in the future, it will have more capacity to do so without compromising the inflation target.”
Annual inflation was 2.24% in July, near the five-decade low of 1.84% posted in March. Inflation may end this year and next year at around 3% or less, Uribe said. The Central Bank targets 2010 inflation between 2% and 4%.
The Central Bank could sell part of its government bond holdings that amounted to COP1.6 trillion ($879.1 million) at the end of July to reduce the amount of local currency in the market, according to Uribe.
Banco de la Republica could also issue its own debt, Uribe said. Policy makers together with the government are also “studying other novelty instruments,” he said, while declining to say what these are.
“The central bank’s ability to sterilize the purchases of dollars will remain limited and, thus, any potential interventions in the foreign-exchange market will also be limited,” Carola Sandy, an economist with Credit Suisse Group AG in New York, wrote in an August 20 report.
The peso will likely strengthen “in the very short term,” she wrote. Credit Suisse revised its year-end forecast for the peso to 1,800 from 2,000 previously, according to the report.
The Central Bank purchased $20 million a day between March 3 and June 30, or $1.6 billion in total, to curb a rally policy makers said left the peso “misaligned.”
Banco de la Republica will announce it will intervene in the market in the same way it did on March 3, “by issuing a statement that will say exactly what is being done,” Uribe said. The March 3 statement came before Colombian markets opened.