Exchange rate policy and inflation targeting in colombia

Transcription

1 Exchange rate policy and inflation targeting in colombia Jorge Toro Head of Economic Studies Department Banco de la República, Colombia ECB, Frankfurt 1,2 March 2007

2 Appreciation OF THE EXCHANGE RATE Steady appreciation since the beginning of , , ,00 Representative Exchange Rate (Pesos for Dollar) Temporary reversal in Q II , , , ,00 05-Nov Dic Feb Abr Jun Jul Sep Nov Dic Ene Feb Abr Jun Jul Sep Nov Dic Feb Abr Jun Jul Sep Nov Dic Feb Abr Jun Jul Sep Nov Dic Feb Abr Jun Jul Sep-05

3 Annual nominal change shows the extent of appreciation Exchange Rate -Annual Percentage Variation- 40,00% 30,00% 20,00% 10,00% 0,00% -10,00% -20,00% 01/01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/ /04/ /07/ /10/ /01/2007 Percentage

4 Appreciation is also real, affecting competitiveness Real Exchange Rate Index (1994 = 100) Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 PPI CPI

5 Appreciation has also affected other Latin countries Nominal Exchange Rate (Index) (January 2003=100) Ene-03 May-03 Sep-03 Ene-04 May-04 Sep-04 Ene-05 May-05 Sep-05 Ene-06 May-06 Sep-06 Ene-07 COLOMBIA BRASIL CHILE PERU

6 Main factors behind appreciation I. Trade

7 Steady increase of commodity prices excluding oil. Commodity price index without Crude Oil (WCF) Dic-95 Dic-96 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Dic-03 Dic-04 Dic-05 Dic-06 Fuente: The Economist Intelligence Unit

8 In particular, the price a of the main Colombian export products increased continuously since 2003 Description Average Forecast 1/ Coffee ($ / lb) Crude Oil ( $ / bbl) Coal ($ / mt) Ferronickel ($ / lb) Gold ($ / toz) / Balance of Payments forecast International Prices

9 Which significantly improved terms of trade Terms of Trade geometric mean 1994= Ene-90 Ene-91 Ene-92 Ene-93 Ene-94 Ene-95 Ene-96 Ene-97 Ene-98 Ene-99 Ene-00 Ene-01 Ene-02 Ene-03 Ene-04 Ene-05 Ene-06 Ene-07

10 Both traditional and non-traditional exports positively reacted to price incentives and sustained world demand US$ Mill Exports Growth Traditional Exports (Last 12 Months) Annual Growth 50% 40% 30% 20% 10% 0% -10% -20% -30% US$ Mill Non-Traditional Exports (Last 12 Months) Exports Growth Annual Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Source. DANE Source. DANE

11 Main factors behind appreciation II. Capital

12 Capital inflows encouraged by a sharp fall in EMBI Nominal Exchange Rate, Embi+ and Embi+ Colombia Embi+ NER Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 NER Colombia Embi+

13 Capital also attracted by high confidence levels Confidence Index for manufacturing sector (Tendencial Component) Consusmer's Confidence Index Aug-05 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Nov-01 Feb-02 May-02 Aug-02 Nov-02 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 (Index) Fuente: Fedesarrollo y Banco de la República Source: Fedesarrollo

14 Capital inflows mostly invested in treasury bills, thus reducing TB interest rates Exchange rate and Treasury bonds interest rate (2020) , , , , , , ,00 10-Ago Sep Sep Oct Nov Dic Ene Feb Mar Mar Abr May Jun Jul Ago Sep Sep Oct Nov Dic Ene Feb-07 Treasuries Exchnage rate (col$/us$) 2.100,00 TES JUL/20 TRM

15 CAPITAL INFLOWS HAVE ALSO BEEN INVESTED IN DOMESTIC SHARES Exchange Rate (TRM) and Stock Index (IGBC) IGBC 2000 TRM Sep Oct Nov Dic Ene Feb Mar Abr May Jun Jul Ago Sep Nov Dic Ene-07 IGBC TRM

16 Capital inflows partly originated in FDI, mainly into the mining (oil; coal) and manufacturing sectors 8,00 Colombia - Net foreign Direct Investment 6,00 4,00 2,00 0,00-2,00-4,00 I III I III I III I III I III I III I III (Percentage of G DP)

17 Growing remittances have significantly contributed to capital inflows Migration Flow and Remmitances Thousand of Persons Million of Dollars Net Migration Flow Cumulated Migration Remmitances

18 FX Intervention by the Banco de la República

19 FX interventions aiming at Accumulating international reserves, Reducing exchange-rate volatility, Moderating unsustainable appreciations or excessive devaluations likely to affect inflation behavior. Modalities of FX interventions: Put (call) options for accumulating (decreasing) international reserves Put (call) options for controlling volatility of the exchange rate Discretionary Intervention

20 Fluctuating conditions in the foreign-exchange market have led to the use of the Bank s different intervention-policy instruments Purchases and Sales of Foreign Exchange by the Banco de la República (Millons de Dollars) 1999* (January) Purchases 200,0 318,6 629,2 251,5 106, , , , ,6 Put Options 200,0 318,6 629,2 251,5 106, ,6 0,0 583,8 0,0 For Accumulation of International Reserves 200,0 318,6 629,2 251,5 106, ,7 0,0 0,0 0,0 For Volatility Control 0,0 0,0 0,0 0,0 0,0 179,9 0,0 583,8 0,0 Discretional Intervention 0,0 0,0 0,0 0,0 0, , , , ,6 Sales 0,0 0,0 0,0 414,0 344,5 500, , ,3 0,0 Call Options 0,0 0,0 0,0 414,0 344,5 0,0 0,0 944,3 0,0 For Decreasing of International Reserves 0,0 0,0 0,0 0,0 344,5 0,0 0,0 0,0 0,0 For Volatility Control 0,0 0,0 0,0 414,0 0,0 0,0 0,0 944,3 0,0 National Government 0,0 0,0 0,0 0,0 500, , ,0 0,0 Net Purchases 200,0 318,6 629,2-162,5-238, , ,4-163, ,6

21 Discretionary intervention widely employed, except during Quarters II; III, and IV of 2006, when appreciation pressures temporary ceased Discretionary Intervention in the FX Market (Million of Dollars) Sep-04 Nov-04 Ene-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Ene-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Ene-07

22 In addition, volatility options, both put and call, have been frequently activated over the last three years Volatility Control Options (excercised) (Million de US$) Ene-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Ene-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Ene-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Ene-07

23 Effectiveness of FX Intervention

24 FX Intervention has been an effective instrument to raise international reserves to adequate levels Net International Reserves Million of Dollars (j) As end of

25 Which helped to improve key indicators of international liquidity 1,40 International Reserves / (Foreign Debt Payments in the next 12 months + Projected Current Account deficit in present year) 1,30 1,20 1,10 1,00 0, proj International Reserves / (Foreign Debt Payments in the next 12 months) 1,15 1,10 1,05 1,00 International Reserves / (Foreign Debt Payments in the next 12 months + Projected Current Account deficit in the next year) 1,65 0,95 1,55 1,45 1,35 1,25 0,90 0, proj 1,15 1,05 0, proj

26 In addition, as it was clear in 2005, FX intervention moderated exchange rate appreciation in the face of transitory shocks Exchange Rate (pesos for Dollar) 3000,0 2900,0 2800,0 2700,0 2600,0 2500,0 2400,0 2300,0 2200,0 2100,0 2000,0 1900,0 1800,0 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Oct-06 Nov-06 Dec-06 Jan-07

27 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% Options for controlling volatility have had a rather poor performance for achieving its purpose. Exchange rate deviation from its 20-days moving average Exchange rate deviation from its 20-days moving average 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% Call volatilility auction US$ 180 m, April 10 0,0% -1,0% -2,0% 06-Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr Abr May May May May May May May May May May May Jun Jun Jun-06 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% Call volatilility auctions US$180 m each. May 16,18,23,25 Exchange rate deviation from its 20-days moving average Exchange rate deviation from its 20-days moving average 1,0% 0,5% 0,0% -0,5% Put volatilility auction US$180 m July 11-1,0% Call volatilility auction $US180 m June 27-1,5% -2,0% -2,5% -3,0% -3,5% 21-Jun Jun Jun Jun Jun Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul Jul-06

28 Consistency between Inflation Targeting and FX Intervention

29 Intervention in the FX market has not prevented to continue the disinflation process and to achieve inflation targets with remarkably precision, particularly for the last three years Thus, on an ex-post basis, it can be said that FX intervention has been consistent with inflation targeting (IT). P e r cen t 6,50 6,00 5,50 5,00 4,50 4,00 3,50 Total CPI Inflation and Inflation Targets Jan-04 M a r-0 4 M a y -0 4 Jul-04 Sep-04 Nov-04 Jan-05 M a r-0 5 M a y -0 5 Jul-05 Sep-05 Nov-05 Jan-06 M a r-0 6 M a y -0 6 Jul-06 Sep-06 Nov-06 Jan-07

30 In part, ex-post consistency has been possible due to the existence of a negative output gap that has permitted to combine a loose monetary policy with FX intervention. 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% -6,0% -7,0% Output Gap (py)

31 Policy coordination with the Treasury: another key element for maintaining consistency The Government has reduced its FX exposure Part of the reserves purchased in the market by the Bank were sold to the Treasury to shift the composition of public debt. The Treasury has kept all its excess liquidity in deposits at the Central Bank (Fiscal restraint helps in this sense).

32 Thus, coordination with the Government has been an effective sterilization device SOURCES OF GROWTH OF THE MONETARY BASE Miles of millions $ I. Net purchases of international reserves II. Treasury Trasfers of Central Bank Profits Deposits Sales of international reserves II. Public bonds held by the Central Bank IV. REPOS V. Others VI. Change of Monetary Base

33 Consistency has also been possible as a result of the significant increase of money demand that has allowed the Central Bank to purchase international reserves as a way to meet the increasing demand for money at the policy interest rates 7,5% 7,0% 6,5% 6,0% 5,5% 5,0% 4,5% 4,0% Monetary Base as Percentage of GDP Dic-94 Jun-95 Dic-95 Jun-96 Dic-96 Jun-97 Dic-97 Jun-98 Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 Dic-03 Jun-04 Dic-04 Jun-05 Dic-05 Jun-06

34 Consistency is reflected in that purchases of reserves have been made in a context of decreasing or constant interest rates (2004-April 2006). However, most recently, as the output gap is becoming positive, and the central bank is progressively increasing its interest rate, consistency between intervention and monetary policy is vanishing US $ m illion Forex Intervention, Policy Interes Rate and Interbank Interest Rate Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 FX Intervention (Mil US$) Interbank Interest Rate (monthly average) Policy Interes Rate 13,0 12,0 11,0 10,0 9,0 8,0 7,0 6,0 5,0 Percent

35 In fact, as inflation is accelerating, monetary authorities will have to continue increasing interest rates. In these conditions, inconsistency between IT and FX intervention will exacerbate Period Target Inflation Active Forecast Transmission Mechanism Model Output Gap Interbank (average) Term Dep (average) Exch. rate Annual Depreciación (avg) Mar-06 4,88 4,16 0,29 5,93 5, ,44 Jun-06 4,75 3,97 0,80 6,15 5, ,28 Sep-06 4,63 4,54 0,47 6,65 6, ,04 Dic-06 4,50 4,47 1,00 7,21 6, ,57 Mar-07 4,37 4,61 1,20 8,22 7, ,21 Jun-07 4,25 4,75 1,26 8,90 8, ,95 Sep-07 4,12 4,03 1,12 9,21 9, ,41 Dic-07 4,00 3,98 0,88 9,37 9, ,39 Mar-08 3,87 4,23 0,54 9,40 10, ,14 Jun-08 3,75 3,98 0,24 9,33 10, ,96 Sep-08 3,62 3,92-0,03 9,12 10, ,46 Dic-08 3,50 3,84-0,30 8,80 10, ,70

36 An active sterilization policy, by using all available mechanisms will need to be implemented in order to prevent inflationary effects of FX intervention. Nonetheless, Sterilization, even if effective, does not solve the problem of inconsistency, and actually could aggravate it In such circumstances FX intervention does not seem to be feasible for too long. What to do? Pure floating is not a feasible option in face enormous interests at stake A decisive countercyclical fiscal policy could help, but it does not seem to be a practical option at least in the short-term