Colombian policy makers are welcoming an emerging market currency rout that has led other central banks to raise interest rates and sell dollars.
The recent drop in the peso is healthy and will lead to more balanced growth in Colombia, central bank Governor Jose Dario Uribe said today. The Andean nation’s low inflation rate means that it hasn’t needed to follow other emerging markets in raising borrowing costs to protect its currency, Uribe said.
“The net effect is favorable,” Uribe said today, in a speech in Bogota to present the bank’s quarterly inflation report. “In real terms there has been a moderate devaluation that can be considered healthy, taking into account that the starting point was a peso that was very strong.”
The Colombian currency fell to its weakest level since 2009 this month amid a sell-off in emerging markets, as the U.S. unwinds stimulus policies that have fueled demand for higher-yielding assets in developing nations. Brazil, South Africa and Turkey raised interest rates last month, while countries such as Peru sold dollars to prevent their currencies from losing value.
The fall in the peso has a “very low” impact on inflation, Uribe said. In the minutes to its January board meeting, also published today, policy makers said that subdued inflation and a low level of unhedged foreign exchange positions mean that the peso can weaken without generating “trauma” for the economy.
At its December board meeting, the central bank said it would purchase as much as $1 billion in the first three months of the year, on top of $6.8 billion it bought in auctions last year.
The central bank’s ongoing dollar purchases are “very clear proof” that policy makers are not worried about the fall in the peso, said Mario Castro, a strategist at Nomura Holdings Inc., in New York.
“The difference between Colombia and many other countries is that inflation is very low,” Castro said in a telephone interview. “That gives the central bank an enormous space before it needs to worry about any inflationary effect.”
The bank has bought an average of $10 million per day since the start of the year. These dollar purchases are designed to build Colombia’s defenses against external shocks, Uribe said.
“We saw the opportunity to continue increasing a little, in a very gradual way, our level of international reserves, to have a bigger cushion if any of these external risks are materialized,” Uribe said.
The peso has weakened 4.3 percent this year, to 2,017.01 per dollar, the biggest drop among major emerging market currencies after the Argentine peso and the Russian ruble.
The economy expanded about 4.5 percent in the fourth quarter from a year earlier, and will grow 3.3 percent to 5.3 percent this year, with 4.3 percent the most probable figure, Uribe said. A slower-than-expected world expansion is the main risk to Colombian growth this year, according to the report.
The peso’s strength in recent years has contributed to a slump in industrial output, even as record foreign investment powered growth in areas such as mining and energy. Manufacturing was the only sector that contracted in the third quarter as the economy expanded 5.1 percent from a year earlier.
Annual inflation accelerated for a second straight month to 2.13 percent in January, after touching a six-decade low in November. Consumer prices will probably rise slightly less than 3 percent this year, Uribe said. Colombia targets inflation of 3 percent, plus or minus one percentage point.
The central bank held its policy rate at 3.25 percent for a 10th straight month at its January board meeting, the lowest among major economies in Latin America. Policy makers’ next move will be to raise the key rate to 3.5 percent in July as economic growth picks up, according to the most recent central bank survey of economists.