The turmoil in the Emerging Markets currencies markets continues. Most EM central bankers seem to be very scared by the continued sell-off in Emerging Markets and central banks around the world have moved to hike interest rates and have intervened to curb the weakening of the Emerging Markets sell-off. This means that most EM central banks effectively are tightening monetary policy in response to a negative external demand shock. This is hardly wise in my view.
However, it is not all EM central bankers who suffer from a fear-of-floating. Hence, today the Colombian peso came under pressure after Colombian central bank governor Jose Dario Uribe said the weakening of the peso is “something we view as positive.” Uribe added that the central bank had “enormous” margin to allow the peso to weaken as inflation continue to be well-below the central bank’s 3% inflation.
Furthermore, it should be noted that given the down-trend in commodity prices Colombian export prices are coming under pressure. Hence, from an Export Price Norm perspective a weakening of the peso is justified from a policy perspective to ensure a stable development in nominal spending.
In recent years the Colombian economy has been a major success story due to significant economy reforms, privatizations and fiscal consolidation. Luckily monetary policy also seems to support the continued positive development in the Colombian economy.
It will be interesting to follow the development in the Colombian economy – where the central bankers seem to understand the value of a floating exchange rate regime – relative to other countries – such as Turkey – where central bankers fear floating exchange rates. Is Colombia the new Australia? And is Turkey the new New Zealand. (See here on Australia and New Zealand in 1997).