Colombia Central Bank May Seek to Check Peso's Rally While Pausing at 3%

Colombia’s central bank may boost dollar purchases and take other steps to check a rally in the peso after President Juan Manuel Santos expressed concern its appreciation is hurting exporters and job growth.

The announcement may come after the bank’s monthly meeting today. Policy makers, led by bank Chief Jose Dario Uribe, will vote to keep the benchmark rate at a record low 3 percent for a sixth month, according to 30 of 32 economists surveyed by Bloomberg. Two analysts forecast a rate cut.

Santos, since taking office Aug. 7, has stepped up pressure on the bank to address the appreciation of the peso, which rose to a 26-month high on Oct. 7. He has brainstormed with his finance team as well as with international observers such as Argentina’s former Economy Minister Domingo Cavallo and Peru’s former Prime Minister Pedro Pablo Kuczynski to come up with what he calls “bold and creative” measures for the currency.

“Even though the current level of the peso doesn’t warrant it, the market is counting on measures to ease the peso,” said Munir Jalil, chief economist at Citigroup Inc.’s Colombia unit. “The bank is in a tough spot. Either it makes announcements and confirms what most of the market is expecting or it waits until the measures are really needed.”

With growth in the $231 billion economy accelerating and annual inflation near the bottom of its 2 percent to 4 percent target range, the bank’s board even has room to weaken the peso by cutting the lending rate, said Julian Marquez, an analyst at Interbolsa SA, Colombia’s biggest brokerage.

Jobs, Capital

In trading today, the peso rose 0.2 percent to 1832.45 per dollar at 12:58 p.m. New York time, boositng its 2010 gain to 11.5 percent, the second-best performance among the 31 most- trade currencies tracked by Bloomberg worldwide after the Japanese yen, which has gained 15.6 percent.

Colombian business associations said in a letter this month to the government and central bank that the strong peso threatens jobs and “jeopardizes the Colombian economy’s positive outlook.”

Santos expects the economy to grow 6 percent annually within two years after a 0.4 percent expansion last year. He intends to create 2.4 million jobs to bring the jobless rate down to single digits from 11.5 percent in September.

“Colombia politically has a peso problem however it’s a many headed snake and it is not as simple as stronger peso costing jobs,” said Rupert Stebbings, head of the Colombian unit of Chilean brokerage Celfin Capital SA. “It could as easily be argued that the lack of investment grade could cost job as well and if the actions taken to combat revaluation are too radical in investors eyes the rating agencies are unlikely to be supportive.”

Credit, Inflows, Inflation

Colombia lost its investment grade rating with Moody’s Investors Service 11 years ago when insurgent violence and a banking crisis helped trigger six straight quarters of contraction between 1998 and 1999.

Standard & Poor’s also cut Colombia below investment grade in 1999.

Steps taken in Brazil, where the real has gained 36 percent since 2008, boosted speculation Colombia may follow suit and restrict capital inflows to ease pressure on the currency. Uribe has maintained that capital controls would only be justified if and when the benefits outweigh the costs.

Annual inflation was 2.28 percent in September, near the five-decade low of 1.84 percent posted in March.

According to the median forecast of 45 economists in a central bank survey this month, inflation will close 2010 at 2.74 percent. Consumer prices will rise 3.42 percent in 2011, according to the median estimate of 37 economists.

Government Response

Steps Colombia may take to stem the peso’s rally include seeking to limit borrowing from abroad, Jalil said.

Uribe may make unannounced direct purchases of dollars in the market without any pre-determined amounts, known as “discretionary purchases,” said Julian Ramirez, an analyst at Bogota-based brokerage Proyectar Valores SA.

The bank also will likely be “more aggressive” in its dollar purchases, Bank of America economist Alejandro Rivera wrote in a report Oct. 26.

Policy makers and the government have already taken a slew of measures aimed at slowing the peso’s appreciation.

Finance Minister Juan Carlos Echeverry on Oct. 13 said the government would keep two dividend payments worth $1.4 billion from state oil company Ecopetrol SA abroad instead of converting the dollars into local currency.

$20 Million a Day

The central bank has been purchasing “at least” $20 million daily in the spot market since Sept. 15 and will do so for “at least” four months to ease peso gains.

“The use of the phrase ‘at least’ certainly helped,” said Marquez. “The fact that the purchases could go on well beyond four months means investors won’t look at the calendar and speculate.”

In a bid to stem a rally in the peso in 2007, the central bank ordered companies and investors taking loans abroad to deposit 40 percent of the funds in the central bank for six months to reduce the incentive to bring in short-term capital.

The Finance Ministry imposed deposit requirements of 50 percent for two years on new portfolio investment in the country, such as the purchase of bonds and stocks. The capital controls were abolished in 2008.

The regulations were unpopular with investors who said they discouraged investment and did little to slow the peso.

Colombia will attract around $10 billion in foreign direct investment this year and more than $1.2 billion in portfolio investment, Bogota-based brokerage Corredores Asociados said in a report last month.

The nation received $7.2 billion of foreign direct investment in 2009 -- of which 80 percent went into oil, coal and mining -- after a record $10.6 billion the previous year, according to the central bank.

To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net;

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