The Colombian central bank weighs the costs of “sterilizing” its purchases of dollars when formulating its policy of reserve accumulation, central bank chief Jose Dario Uribe said.
“The accumulation of reserves always starts from a careful analysis of the costs and the benefits, and of the opportunity costs, being responsible with the country, and taking into account that sterilizing reserve accumulation costs about 9 billion pesos ($4.9 million) for every $100 million bought,” Uribe wrote in a paper published on the central bank’s website today.
Colombia’s peso fell for an eighth day today, its longest losing streak since August 2008, on speculation officials will step up intervention to weaken the currency. Finance Minister Juan Carlos Echeverry said yesterday that he is pleased with the recent fall in the peso while it is too early to declare victory in the “currency war.”
The central bank never buys reserves “in magnitudes and ways that erode the credibility and reputation of the central bank,” Uribe wrote.
“Massive” exchange rate intervention can cause excess credit growth and asset price bubbles if it is not sterilized, Uribe wrote. If the massive intervention is sterilized, it has high “quasi-fiscal” costs that will sooner or later make the strategy unsustainable, Uribe wrote.
The peso weakened 1.6 percent this week, the biggest fall among major Latin American currencies tracked by Bloomberg. The currency pared its rally this year to 6.5 percent, still the largest among global counterparts after the Hungarian forint and the Chilean peso.
The central bank has intervened in currency markets to have foreign exchange reserves at levels that guarantee international payments, and reduce the country’s vulnerability to external shocks, Uribe said.
The intervention also aimed to moderate episodes of excess volatility, Uribe said.
Central bank board member Cesar Vallejo earlier this week said that policy makers are considering doubling the bank’s daily dollar purchases to $40 million or extending the program beyond its scheduled end in November.
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