(Reuters) – Colombia’s central bank may not be able to change the upward trend of the peso currency over the next five years, board member Juan Jose Echavarria said on Wednesday.
Colombian and other Latin American countries have been bolstering their defenses ahead of what could be a new battle in the “currency wars” as dollar inflows put unwelcome upward pressure on their currencies.
In a bid to ease gains in the peso, Colombia’s monetary authority on Monday stepped up its daily dollar purchases to at least $30 million between February and May from $20 million or more now. The bank is set to spend at least $3 billion in total.
Echavarria argued that the peso’s appreciation was due to fiscal deficits, savings problems and “Dutch Disease”, which is when money inflows from commodity exports push up the value of a currency and hurt other sectors, like manufacturing.
“I do believe in Colombia there is a complicated exchange rate problem that doesn’t have to do with the central bank,” he told an economic seminar in Bogota.
“The (central) bank cannot change the exchange rate in the next five years,” he said.
Echavarria, a moderate member of the monetary authority’s seven board directors, will step down after the February policy meeting when his term expires. Another member, Fernando Tenjo, will also be replaced on the board.
In some ways, Colombia is the victim of its own success as improved security over the last decade opened up many parts of the country to more investment from oil and mining companies, whose dollars are a key contributor to the peso’s strength.
The peso was one of the world’s strongest gaining currencies last year, firming nearly 9 percent, a trend that has continued into 2013.
Since the central bank’s announcement on Monday of increased intervention, the peso has gained 0.18 percent to close at 1,776.51 against the dollar on Wednesday.
Traders said the strengthening this week was due to the unwinding of long dollar positions that had been built based on expectations of more aggressive measures.
“One can have a stabilization strategy for the exchange rate that can be really effective, but changing the long-term level is almost impossible,” Echavarria said.
MORE RATE CUTS?
Economic policymakers have continued their verbal offensive against the exchange rate. Finance Minister Mauricio Cardenas has said that the currency’s equilibrium is about 10 percent weaker than the current level.
A strong peso hurts exporters who receive dollars for sales but pay costs in pesos while local manufacturing suffers from an influx of cheaper imports.
To help protect industry, the government introduced an import charge on textiles and shoes of $5 per kilogram while the tariffs applied to formal importers would be lowered.
President Juan Manuel Santos’ administration vows to keep dollars from overseas debt sales abroad. It is asking state-run oil company Ecopetrol not to take on dollar debt for financing and is using excess treasury funds to buy greenbacks.
Policymakers around the region are also taking action.
Peru is intervening aggressively to curb currency gains. Costa Rica has unveiled a steep hike in taxes on foreign investments while even Mexico, which has a hands-off approach to currency intervention, is considering an interest rate cut.
Low interest rates in developed economies encourage investors to look for yield elsewhere, pushing up the currencies of countries at the receiving end of their attention.
While Colombia’s central bank’s main focus is on fighting inflation, which is currently controlled below the target range, it has cut the benchmark lending rate in the last three months, making it the lowest in the region.
Some members of the board think there is room to continue lowering the interest rate, Echavarria said, without saying whether he was in agreement. On Monday, some members had wanted a larger cut than the quarter point that was announced.
“What’s happening? GDP is growing below its potential. That gives a reason to lower rates. Inflation is below the target, that gives a reason to lower rates,” he said.
“The only thing that tangles the story a bit is that there are fears that credit is still growing at high rates, housing prices continue to rise more than other prices.”