| Objective
of the exchange rate policy |
Objectives of the foreign exchange rate policy
Monetary policy strategies have been implemented within a flexible exchange rate scheme that is governed by intervention rules with the following objectives:
- To maintain an adequate level of international reserves that
will lessen the economy’s vulnarability to external shocks,
both in the current and capital accounts.
- To limit excessive volatility of the exchange rate in the short term, and
- To moderate excessive appreciation or depreciation of the nominal exchange rate that could jeopardise the achievement of future inflation targets, as well as the economy’s external and financial stability.
| Tools
for exchange rate intervention |
Foreign exchange market intervention
The Banco de la República offers a variety of intervention mechanisms, such as the following:
- Intervention by means of the automatic auction of options, giving the holder the right to sell or buy foreign exchange to or from the central bank, every time the [nominal] exchange rate deviates by 5% over the last 20 working days mobile average.
- The Bank may intervene through option auctions, at its discretion, thereby allowing for the sale of foreign exchange to the Bank in order to accumulate international reserves.
- The Bank may intervene through option auctions, at its discretion, thereby allowing for the purchase of foreign exchange from the Bank in order not to accumulate international reserves.
- The Bank, at its own discretion, may purchase or sell foreign exchange directly on the foreign exchange market
- The Bank may intervene through competitive auctions to purchase foreign exchange in the foreign exchange market.
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| Consistency between exchange rate policy and monetary policy |
Consistency with achieving the Inflation Target
Within an Inflation Objective monetary policy such as that practised in Colombia, it is necessary to evaluate whether an intervention exchange policy is coherent with the achievement of inflation objectives. Furthermore, it is necessary to evaluate whether the intervention policy is consistent with the operational scheme of the Inflation Objective strategy. With the aim of guaranteeing consistency between both policies the following criteria should be borne in mind:
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Interest rates are the primary instrument of monetary policy and should be moving in a direction that is consistent with achieving inflation targets. This means that if the inflation prognosis is above the target, the Bank will adjust its interest rates upwards, and lower them if the prognosis is below target.
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Foreign exchange intervention should take place in a manner that is coherent with the monetary policy position. Therefor, for example, the purchase of foreign exchange does not occur at the same time that the Bank’s intervention rates increase. In the same way, the sale of foreign exchange does not take place at the same time as the Bank’s interest rates decrease.
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If the projected inflation is below target, the inflation target strategy would suggest a less restrictive monetary policy, which is compatible with the purchase of foreign exchange by the central bank to lessen appreciation of the domestic currency.
- If the projected inflation is above the target, the inflation target strategy would suggest a more restrictive monetary policy. If, in this context, the Bank had scheduled foreign exchange purchases, then there would be a conflict between the monetary and exchange rate policies. In this case, the central bank would have to compensate the resulting expansion from its exchange intervention, by using monetary contraction operations. This is known as sterilised intervention.
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In keeping with the transparency that characterises the inflation target scheme, it is appropriate to declare foreign exchange interventions.
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During intervention by means of auctions, the intervention amounts are declared in advance and the amounts approved or exercised are declared on the same day that the Bank makes its intervention.
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In the case of direct discretionary interventions in the market made by the Bank, the market is notified of the intervention amount at the end of each month. This currently takes place at the beginning of the second week of the following month.
For more details on the foreign exchange market intervention in Colombia, the following documents may be consulted:
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