Colombia’s central bank is studying the possibility of doubling its daily dollar purchases to $40 million to curb the world’s biggest currency rally, central bank co-director Cesar Vallejo said.
Policy makers could also extend the current round of daily dollar purchases beyond the scheduled end date in November, Vallejo said in an interview in Bogota yesterday.
“If we change, it would be from $20 million to $40 million, for an announced time frame,” Vallejo said. “The other alternative would be, instead of stopping in November, to keep buying until December 31, or until February.”
The peso has strengthened 8.1 percent this year, the most of 170 currencies tracked by Bloomberg, as oil and mining projects continue to attract near-record levels of foreign investment, even amid Europe’s debt crisis. The central bank has so far ignored repeated calls from President Juan Manuel Santos and Finance Minister Juan Carlos Echeverry to step up its purchases of dollars to weaken the currency to help exporters such as coffee and flower growers.
The bank is not considering Santos’ proposal to increase foreign currency reserves by $13 billion, which would “completely distort” local credit markets, Vallejo said. The amount of debt the bank would need to sell to mop up liquidity from the dollar purchases would be “brutal,” and could attract foreign capital that would fuel the peso’s rally, he said.
Colombia had foreign currency reserves of $34.7 billion as of July.
Academic Study
The argument for increasing currency intervention would be stronger if the peso appreciates further, Vallejo said. At the same time, there would be no point in incurring the cost of buying dollars if the currency weakened because of the international crisis, Vallejo said.
A study by Colombia’s Finance Ministry, which found that the optimum level of reserves for the Andean nation is $54 billion, “is of no more than academic use,” central bank chief Jose Dario Uribe said last week. The economic model contained in the July report is very sensitive to the assumptions programmed into it, making it of little practical use, he said.
The central bank last month cut interest rates for the first time since 2010 and trimmed its growth forecasts after industrial output fell for a third straight month in May on a year-on-year basis. Growth is being affected by a slowdown in the global economy, which is curbing demand for the country’s exports, the central bank said in the minutes to its July policy meeting.
Key Determinant
The “key” determinant of interest rate moves is whether gross domestic product is growing faster or slower than its long-term potential rate, and whether it is accelerating or slowing, Vallejo said.
The central bank last month cut its forecast for 2012 GDP growth to between 3 percent and 5 percent, from 4 percent to 6 percent, and predicted growth of 2 percent to 5 percent next year. Uribe said last month that the economy’s long-term potential growth rate is between 4 percent and 5 percent.
The central bank will cut its benchmark interest rate a quarter point to 4.75 percent at its Aug. 31 policy meeting, according to 10 out of 11 analysts surveyed by Bloomberg.
Last month’s rate cut marked the end of a “phase of stability” in interest rates and the start of a “phase of reduction,” said Echeverry, who sits on the bank’s seven-member policy committee, in a speech in Cartagena last week.
Colombia’s annual inflation slowed to 3.03 percent in July, lower than all but one forecast in a Bloomberg survey of 24 analysts, and down from 3.73 percent at the start of the year. Colombia targets inflation of 3 percent, plus or minus one percentage point.
