The Colombian peso continues to fall as economic growth declines, alongside rising inflation and benchmark interest rates. Since August, the Colombian peso has fallen nearly 35% against the U.S. dollar, shown below.
Data provided by Trading View
Colombia's central bank left rates unchanged in February, even as economic growth declined in recent months due to falling commodity prices. The interest rate was left unchanged at 4.5%, having risen from a low near 3% when commodity prices began to tumble early last year. The rise in interest rates have been in an effort to deter capital outflows, and stop increasing inflation as imports become more expensive in an environment of a falling currency.
"Trade terms in Colombia decreased significantly in late 2014. In recent weeks, oil prices and several commodities which Colombia exports and imports have ceased their fall. Some of the decline in the terms of trade will be permanent and will be reflected in lower national income.
In February the risk premiums of Colombia and several countries in the region declined but remained at levels higher than the average recorded in 2014. So far this year, the information on the exchange rate shows that capital inflows, both direct and portfolio investment, remain dynamic," according to Reuters.
As was stated above, the falling price of commodities hurt exports in recent months, weighing on overall economic growth. In the third quarter, the economic growth figure came in at an annual pace of 4.2%, below the previous quarter's reading of 4.3%, as well as missing estimates for 4.3%. Since peaking in 2011, economic growth in Colombia has fallen from an 8% annual pace, to current levels, seen below. With export revenue expected to remain suppressed in coming quarters, economic growth could suffer.
"New information for the fourth quarter of 2014 suggests that domestic demand remained dynamic and net exports have diminished more than expected. With this information, the economic growth forecast for 2014 of 4.5 percent to 5 percent, with 4.8 percent as more probable figure, was maintained.
As a result of the sharp fall in oil export revenues and buoyant domestic demand, the deficit in the current account of the balance of payments has widened. During the first three quarters of 2014, it amounted to 4.6 percent of GDP, up from 3.3 percent of GDP in the same period of 2013. The evolution of exports and imports during the fourth quarter of 2014 points to a further widening of the deficit," according to Reuters.
Lastly, volatile inflation measures the last few years have weighed on officials' policy decisions, leading to uncertainty in economic growth. In January, the inflation figure came in at an annual pace of 3.82%, above the previous month's reading of 3.66%, as well as exceeding estimates for 3.7%. Over the last year inflation has nearly doubled, from under 2%, to current levels. Policymakers blame rising food prices as being one of the main contributors to inflation growth.
"In January inflation rose and stood at 3.82 percent, higher than projected by the bank's technical team and the market. The acceleration in inflation is mainly explained by the higher rate of increase in food prices. The average in core inflation measures has increased for four months and reached 3.22 percent," according to Reuters.
With economic growth and inflation trending in opposite directions, policymakers are left with raising interest rates to deter capital outflows. Colombia is better off than many of its Latin American peers, but uncertainty regarding future commodity prices and economic activity leave the peso in a strong downtrend against the U.S. dollar, which should continue in coming months.