* Central bank increases, extends intervention program
* Peso currency continues on strengthening trend
* Govt worried about impact on manufacturing, export sector
By Nelson Bocanegra
BOGOTA, Jan 30 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
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
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."