Colombia Peso Gains Most in Five Years on Interest Rate Surprise

  • Central bank will auction call options to limit FX volatility
  • Peso reaches 15-week high; biggest gain among major currencies

Colombia’s peso rose the most in almost five years after the central bank increased interest rates by more than analysts forecast and said it would intervene to support the currency on days it plunges too much.

The peso jumped 3.5 percent to 2,799.19 per dollar Tuesday in Bogota, sending it to the strongest level since July and making it the best performer among 31 major currencies. Policy makers raised the benchmark rate by half a percentage point on Oct. 30 to suppress inflation running at a six-year high and announced the central bank will auction call options to limit foreign-exchange volatility.

Currency recovering to strongest since July
Currency recovering to strongest since July

While policy makers are now concerned the peso’s weakness is contributing to inflation, just two years ago, Finance Minister Mauricio Cardenas called the peso’s strength “the mother of all problems” as banana farmers and flower growers said the currency was making it hard for them to compete. The peso has been battered over the past year, sinking 26 percent as the decline in oil prices sapped growth and put the country on track for the biggest current account deficit in at least 30 years.

The central bank “seems to be signaling that it is ready to begin to step into the foreign-exchange market if needed to keep inflation expectations under control,” Mario Castro, a strategist at Nomura Holdings Inc., wrote in a report.

Inflation reached 5.35 percent in September as poor weather caused a spike in food prices and the weaker peso made imports more expensive. The country targets price increases of 3 percent.

“They don’t want inflation expectations to be tainted because people keep expecting the peso to weaken,” said Sergio Olarte, an economist at BTG Pactual.

The central bank raised the benchmark rate to 5.25 percent, surprising all but one of 36 analysts surveyed by Bloomberg, most of whom were expecting just a quarter-percentage point increase. Central bank Governor Jose Dario Uribe told Caracol Radio on Tuesday that the move shows the bank’s commitment to bringing down inflation to its target.

The advance was also helped by oil, which rose to a two-week high Tuesday, Olarte said. While Colombia isn’t even among the world’s top 15 producers, crude accounts for about 40 percent of its exports. As prices tumbled 55 percent since the end of June 2014, policy makers cut growth forecasts and now predict the slowest expansion since 2009.

The plan to auction $500 million call options whenever the peso weakens 7 percent or more below its 20-day moving average might be mostly symbolic, according to Nomura. Applying the intervention rule retroactively since January 2014, the central bank would have sold options for only two episodes of weakness in December 2014 and August 2014, both of which were caused by global turmoil, data compiled by Bloomberg show.

Colombian markets were closed Monday for a holiday.

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