Colombia's Peso Declines as Central Bank Extends Dollar Purchase Program

Colombia’s peso fell for a fifth day after the central bank said it will extend its daily dollar purchases in the local market for at least three more months.

Policy makers unexpectedly raised the overnight lending rate by 25 basis points to 3.25 percent, surprising all but two of 23 economists surveyed by Bloomberg. Yields on peso bonds, known as TES, fell the most in a week on speculation the rate increase will keep inflation in check, according to Andres Pardo, head analyst at financial services holding company Corp. Financiera Colombiana, known as Corficolombiana.

The peso dropped 0.4 percent to 1,907.15 per U.S. dollar at 2:40 p.m. New York time, from 1,898.75 yesterday. It slid 1.6 percent this week, its biggest decline since the period ended Dec. 17.

“The announcement on extended dollar purchases is helping push declines in the peso,” said Pardo. “It would’ve been a different story if the central bank didn’t extend them, as higher rates imply strengthening pressure on the currency.”

Banco de la Republica will buy a minimum of $20 million daily in the spot market until “at least” June 17, central bank chief Jose Dario Uribe said today after the bank’s monetary policy meeting.

In a bid to ease gains in the local currency, the central bank began buying a minimum of $20 million a day on Sept. 15 through auctions that it had previously said would last “at least” through March 15. The peso has dropped 6.1 percent since the daily dollar purchases began.

‘Highly Effective’

“The intervention has been highly effective,” Uribe told reporters today.

Finance Minister Juan Carlos Echeverry said today that the treasury is keeping pesos in the central bank in order to compensate for the increased liquidity from the dollar purchases.

The yield on the benchmark 11 percent bonds due July 2020 fell five basis points, or 0.05 percentage point, to 8.30 percent, according to Colombia’s stock exchange. The bond’s price rose 0.316 centavo to 117.095 centavos per peso.

“The rate hike was done exclusively to control inflation expectations,” said Pardo. “The TES market was pressuring the move.”

Inflation concerns mounted this month as truckers blocked roads in a nationwide strike, adding to expectations for higher food prices after floods that left at least 300 dead, damaged crops and closed farm roads. On Feb. 18, truckers agreed to end their two-week strike.

The gap between yields on government inflation-indexed bonds due 2013 and similar-maturity fixed-rate debt, a gauge of annual consumer price increase expectations known as the breakeven rate, rose to 430 basis points today from 393 two months ago. It touched 473 on Jan. 7, the widest since March.

Annual inflation was 3.4 percent in January, the highest rate since June 2009. The central bank targets annual inflation of 2 percent to 4 percent.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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