Colombia cuts for second straight month

It was quite a week for Colombia. It all started with an attack on one of Ecopetrol’s pipelines on Sunday, followed by President Juan Manuel Santos asking his whole cabinet to hand in resignations on Wednesday and the removal of finance minister Juan Carlos Echeverry on Thursday.

Finally, on Friday –after a bomb blast in the troubled southwest that left one dead – Colombia’s Central Bank chopped its benchmark interest rate 25 basis points, down to 4.75, for the second consecutive month to try and boost a still strong, but increasingly slowing economy.

It was Echeverry’s last meeting as member of the board, and he finally got what he’s been pressing for months: the central bank on Friday also agreed buy $700m in the foreign exchange market for the rest of August and September to ease the appreciation of the peso, which has strengthened almost 7 per cent this year.

Rupert Stebbings, an analyst with CELFIN, a brokerage based in Medellín, wrote in a note to clients on Friday afternoon:

Fully as expected the Central Bank cut rates by 25bps to 4.75% however the tone for choice was more positive than we have seen recently with mentions of the better macro data. What will grab attention and moved the Peso immediately was the announcement of an additional US$700mn in dollar purchases through the end of September – as the Government have been asking for several months, it is of course arguable whether this is necessary given than rates are coming down and the terms of trade have now turned negative.

Echeverry, -who some analysts believe might have presidential ambitions, but openly said he would like to teach overseas for a while – has been increasingly arguing that the central bank should play a bigger role in stemming the rise of the peso.

His successor, former energy and mining minister, Mauricio Cárdenas – also a US-educated economist – echoes his predecessor’s views. After his appointment, he pledged to use “all necessary tools” to protect the Andean country’s economy from a rally in the peso. Several Colombian analysts consulted by beyondbrics agreed there would not be many surprises when it comes to the handling of the economy. They also agree that Echeverry’s futile attempts to pass quite a complex fiscal reform is not likely to be a move Cárdenas would follow.

Echeverry, who was once a teaching assistant for Ben Bernanke while a student in the United States, recalls when last year he coincidentally crossed paths with the Fed’s Chairman. “I asked him if he remembered me. And he asked me what I was doing,” Echeverry says. “I replied I was Colombia’s finance minister. ‘You see, being in my classes helps’, he told me. I will have to update him now.”

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