Colombian Finance Minister Mauricio Cardenas said he saw no downside to the recent weakening of the peso and that the currency had space to continue depreciating as the U.S. Federal Reserve withdraws its monetary stimulus.
With inflation close to a six-decade low, the government isn’t concerned that a weaker peso will stoke faster price rises and isn’t trying to halt its slide, Cardenas said today in an interview in London. Annual inflation will probably be closer to 2.5 percent than to 3 percent this year, he said.
“Our currency was overvalued and this is just correcting that and as you can see we don’t have an inflationary problem,” Cardenas said. “There’s space for the currency to depreciate before it causes us concerns, so for now the depreciation of the currency is not sweet and sour, it’s only sweet.”
Emerging market currencies have tumbled around the world this month on speculation a pick-up in the U.S. economy will prompt the Federal Reserve to scale back its asset-purchase program. Brazilian President Dilma Rousseff this week scrapped a levy on foreign purchases of bonds to try to prevent the real from sliding further.
Colombia’s peso has fallen 7 percent this year, the biggest decline among 24 major emerging market currencies tracked by Bloomberg, after the South African rand and the Argentine peso. The government of President Juan Manuel Santos has repeatedly tried to weaken the currency, saying its strength is hurting the Andean nation’s industry and agriculture.
Colombian consumer prices rose 2 percent in May from a year earlier, at the low end of the central bank’s target range. In February, inflation was 1.83 percent, its slowest pace in six decades. Colombia targets inflation of 3 percent, plus or minus one percentage point.
Inflation will accelerate in 2014 as consumer demand picks up, economic growth accelerates and the weaker peso causes some prices to rise, Cardenas said.
The government will probably cut its 2013 forecast for gross domestic product growth to 4.4 percent to 4.5 percent, Cardenas said, from the current 4.8 percent. After cutting its policy rate by 2 percentage points over the last year, the economy now has the right amount of stimulus, he said.
“We think with the current rate, the economy is going to grow by the end of this year at a rate which is close to potential – somewhere around 4.5 percent,” he said. “We feel confident that with the current policy stance our economy is on the right track and has the right amount of stimulus.”
The central bank’s policy committee, which Cardenas chairs, held its benchmark interest rate at 3.25 percent at its last two meetings, the lowest rate among major Latin American economies. Policy makers could adjust the rate in either direction depending on how the economy performs, Cardenas said.
The economy expanded by about 2.8 percent in the first quarter from a year earlier, Cardenas said. The national statistics agency publishes its first quarter GDP report on June 20.
The central bank voted unanimously at its May policy meeting to buy $2.5 billion between June and September, compared with $3 billion between February and May. In April the government said it would change the rules governing pension funds to encourage them to invest more outside the country.