Reuters: US Dollar Report: Exiting Colombia finance minister in final bid to stem peso gain

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Exiting Colombia finance minister in final bid to stem peso gain Aug 24th 2012, 14:21 Fri Aug 24, 2012 10:21am EDT * Finance minister will attend his final central bank meeting on Friday * Central bank expected to cut interest rate again * Peso is one of world's strongest gaining currencies By Helen Murphy BOGOTA, Aug 24 (Reuters) - Colombia's outgoing Finance Minister Juan Carlos Echeverry will "once again try to persuade" central bank policymakers at his final board meeting on Friday to be more aggressive in its handling of the currency and ease gains in the peso. Echeverry, who resigned this week and will be replaced by current Energy Minister Mauricio Cardenas, has been increasingly vocal in recent weeks that the bank should play a bigger role in stemming the peso, one of the world's top gaining currencies. Echeverry will vote for a last time at the seven-member board meeting on Friday. A Reuters survey of 35 economists show most expect the bank to cut the benchmark lending rate a quarter point to 4.75 percent to help stimulate a slowing economy. "Colombia is confronting a world currency war and those that don't participate in the war, lose," Echeverry said late Thursday after President Juan Manuel Santos announced the first of a series of changes to his cabinet. "We have inflation near 3 percent and that gives us a lot of tranquility ... while there's no challenge with inflation the bank can intervene more." Last month Echeverry called for a heftier cut than the 25 basis points that put the rate at 5 percent in an effort to bolster the economy as the international financial crisis crimps overseas sales and weaker sentiment slows consumer spending. The central bank board, led by central bank chief Jose Dario Uribe, hopes to provide Colombians with more cash to spend on big-ticket items amid a weakening of industrial output and retail sales in recent months. A better-than-expected reading for manufacturing in June may lead some board members to waver at the meeting. Of the 35 economists polled by Reuters, 28 expect another cut and the remainder forecast the bank will hold off to analyze second quarter economic data that will be released on Sept. 20. The Reuters poll was conducted before data showed industrial output rebounded 2.8 percent in June, reducing some of the urgency to cut rates. Discussion has weighed more heavily on the global financial climate in recent policy meetings as inflation remains anchored near the mid-point of the bank's 2 percent to 4 percent target range for the year. "The board has a tendency to surprise with risk of inaction at the policy meeting after stronger than expected retail sales and industrial production," said Siobhan Morden, head of Latin America strategy at Jefferies & Co. Inc. in New York. "Meanwhile, global risks have receded while the central bank argues that the recent rate cut was explained mostly for external risk factors." MODERATING GROWTH AND CURRENCY WORRIES The bank has already lowered its official estimate for 2012 gross domestic product growth to between 3 percent and 5 percent, but Uribe said last month that it expected expansion of at least 4 percent. Next year's growth is more uncertain, he said, forecasting a growth of as low as 2 percent. The monetary authority in the past year wrestled to rein in bank lending as households became too indebted, boosting the lending rate 225 basis points over a year. Now, as the impact of those hikes is felt in the pockets of consumers, the bank may want to provide some slack for Colombians to spend. Moderating domestic growth in the $330 billion economy has been exacerbated by a strong currency, which boosts costs for exporters which earn in dollars but pay costs in pesos. A military crackdown on drug-funded insurgent groups has made Colombia much more attractive to investors, once fearful of visiting the nation as Marxist FARC rebels and paramilitary groups bombed corporate installations and kidnapped workers. Even as the economy slows, optimism may bring as much as $17 billion in foreign direct investment this year, Echeverry has said, putting more pressure on the peso, which has already gained 6.9 percent so far this year. The government has bought $500 million in the past two weeks to bolster efforts by the central bank to hold back the peso. The bank has a dollar purchasing program in place until November to buy at least $20 million daily on the spot market. Echeverry wants the bank to buy at least $40 million a day. Newly appointed Cardenas, an economist from the University of California at Berkeley, said late Thursday he is aware of the problems caused by he strong currency and would use "all necessary tools to fight it." "Cardenas will take a more aggressive foreign exchange stance," said BNP Paribas analyst Nader Nazmi in a note to investors. "He does not see an appreciated peso as a sign of Colombia's strength, but considers it as a potential source of vulnerability to global forces." Nazmi also expects Cardenas to seek further rate cuts. Link this Share this Digg this Email Reprints

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