BOGOTA Colombia's central bank chief said on Friday his main challenge over the medium term was preparing the nation for a normalization of U.S. monetary policy, possible rate hikes by developed nations and a drop in commodity prices.
After years of near-zero interest rates, the United States is showing signs that an end to expansive monetary policies could occur in two or three years as its economy gains steam, Jose Dario Uribe told the Reuters Latin America Investment Summit.
"In the medium term, or maybe further down the line, probably the biggest challenge from the point of view of monetary policy is to be well prepared for a process to normalize monetary policy, in particular in the United States," said Uribe, who heads the seven-member board at the central bank.
That could slow capital flows into emerging markets like Colombia, which made its currency among the strongest worldwide last year.
Colombia would be able to adjust its monetary policy easily if the United States chose to implement counter-cyclical policies, but the country may struggle if debt problems in Europe and higher inflation in industrialized countries lead to higher interest rates there, Uribe said.
"This type of interest rate hikes could of course be more traumatic and one must be permanently thinking about the possibility," Uribe said.
The central bank last month ended a five-month cycle of interest rate cuts - leaving the benchmark interest rate at 3.25 percent - after the government unveiled measures to weaken the peso and bolster the slowing economy.
But with inflation near the bottom end of the bank's 2 percent to 4 percent target range, policymakers may now opt to take a neutral approach to monetary policy in the short term, as they wait for the rate cuts to have effect.
"To be honest, I see that the Colombian economy is going to grow more than 4 percent this year and inflation is going to be around 3 percent. So I see that it's really good," Uribe said in an interview at his Bogota office.
"But what makes me a bit uneasy is that I look forward and I see shocks that could eventually happen and (I wonder) what's the best way to prepare for those shocks."
Uribe, who has been at the helm of the bank since 2005, also expressed concern that commodity prices may drop further. Colombia is a leading exporter of oil, coal and coffee. The value of the country's exports has fallen for five straight months, slipping 20 percent from March 2012.
Uribe hinted that the central bank's cycle of expansive monetary policy may have slowed down, or stopped altogether.
"One is relaxed about the decrease in interest rates because the economy needs that decrease ... but we also know that low interest rates for long periods of times could lead to high-risk decisions."
The central bank has engaged in currency intervention, buying at least $30 million daily on the spot market in a bid to weaken the peso, which last year gained 9 percent, cutting into the revenues of exporters and manufacturers.
Actual, as well as verbal intervention by Uribe and Finance Minister Mauricio Cardenas, have weakened the peso by 5.4 percent this year.
"Foreign reserves have increased greatly. Last year, we bought almost $5 billion. ... This year, we will be buying at least $3.5 billion. Let's see what we do for the rest of the year. We already have foreign reserves that are close to $40 billion," Uribe said.
He said high foreign reserves could help protect the Colombian economy from external shocks.
(Additional reporting by Luis Jaime Acosta; Writing by Eduardo Garcia; Editing by Peter Cooney)