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Colombian Central Banker Rejects Intervention to Stem Peso Drop

·3 min read

(Bloomberg) -- Colombia’s flexible peso helps the economy weather shocks, and the central bank should refrain from intervening to stem its recent plunge, according to one of the bank’s board members.

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“I personally do not think that FX interventions are appropriate under the current circumstances,” central bank co-director Mauricio Villamizar said, in response to written questions.

The peso has suffered the world’s biggest drop since last month’s election, triggering a warning from President-elect Gustavo Petro, who urged Colombians not to bet against the currency. The bank intervened in foreign exchange markets amid a similar-sized peso drop in March 2020 at the start of the pandemic.

Action from central banks can sometimes be useful when liquidity in currency markets is low, as it was at that moment, Villamizar said.

Villamizar’s comments echo those of the bank’s Governor Leonardo Villar, who told Semana Magazine this week that trying to fight the peso’s drop would probably be futile and very expensive. The peso has weakened 13% since last month’s presidential election, the most among more than 140 currencies tracked by Bloomberg.

The currency pared losses on Wednesday, gaining more than 3% against the dollar.

Read more: Petro Urges Colombians Not to Bet Against Their Diving Currency

While Colombia’s drop was the steepest, all the major emerging-market currencies weakened over that period amid broad dollar strength. Faster interest rate increases in the US affects most currencies, while the fall in the oil price is also a key indicator for the peso, Villamizar said.

The “pass-through” of a weaker currency to inflation depends on the strength of the economy, with a bigger impact when it is operating close to capacity. It also depends on the inflation rate, with more pass-through when this is high, and on the duration of the depreciation, Villamizar said.

“The current scenario is somewhat bleak in all three determinants,” Villamizar said.

Annual inflation accelerated to 9.7% last month, more than three times the 3% target. Villamizar and his colleagues on the central bank’s board last month implemented the biggest interest rate increase in more than two decades, raising the policy rate 1.5 percentage point to 7.5%.

Colombia’s level of foreign currency debt is “definitely a concern”, since the peso drop and tighter financing conditions abroad increase its cost, Villamizar said. At the same time, the bank’s international reserves are above the level the International Monetary Fund considers to be adequate, he added.

To read Villamizar’s replies in full, click here.

Colombia currently has about $70 billion in foreign currency debt, and about $57 billion in international reserves.

Many Colombians and foreign investors are nervous about some of Petro’s economic plans, including his proposal to phase out fossil fuels, which account for about half of the nation’s exports. Petro was elected president on June 19, and takes office Aug. 7.

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