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Currency depreciation eases but
officials announce intention to intervene
In February, the pace of currency depreciation eased further. The peso
weakened by 1.0% in nominal terms, which was down from the 3.7%
depreciation observed in December 2002 and 2.1% in January. As a result of
the depreciation, the exchange rate has reached 2,956 pesos to the US$,
3.1% weaker than at the end of December. Lingering concerns about the
possibilities of further deterioration in the currency in response to the
war in Iraq as well as the persistent uncertainty in crisis-ridden
Venezuela (for details see February 2003 edition), prompted the Central
Bank to announce its intention to intervene in the foreign exchange
market. Monetary officials wish to counteract a further increase in
inflationary expectations, which have been driven upwards by concerns
about the pass-through of the current currency depreciation to domestic
prices. The Central Bank is eager to maintain interest rates stable at
their current historical lows in order to foster a rebound in economic
activity and instead is choosing to intervene in the foreign exchange
market rather than threaten to choke off the fragile economy. Despite
rising inflation, the Central Bank has maintained interest rates virtually
unchanged. In February, the Central Bank raised the benchmark DTF interest
rate by 0.17 percentage points, which still has interest rates at
historical lows. Nevertheless, Consensus Forecast participants expect
officials to tighten monetary reins throughout the year, with the DTF
interest rate seen rising to 9.6%, which is down 0.2 percentage points
from last month.
Monetary officials plan to auction US$ 1.0 billion in US$ call options,
which will be valid through March and can be exercised once the
representative market exchange rate exceeds the 20 day moving average. The
first auction of US$ 200 million was held on 27 February. Despite the new
exchange rate policy changes, participants expect the peso to depreciate
3.3% this year, which is 0.3% weaker than in last month’s publication. As
a result, the currency is now expected to close the year at 2,962 pesos to
the US$.
Upward pressure on consumer prices
persists amid higher fuel prices
Consumer prices rose 1.11% in February, which was a notch below the 1.26%
rate observed in February last year. The February figure brought down the
annual inflation rate to 7.2% - down from 7.4% in January. Education
prices registered the strongest monthly increase, followed by
transport/communications and health. Transportation prices continue to
experience upward pressures amid rising fuel prices, while education costs
were driven up by increased spending in light of the new school year. The
annual inflation rate remains well above the Central Bank target range of
5% to 6% set for 2003. The full impact on domestic prices of the tax
increases from the beginning of the year is still uncertain, while the
possibility of a further weakening of the exchange rate looms heavy over
inflationary expectations. Nevertheless, participants expect inflation to
continue on a downward trend with the annual rate dropping to 6.2%.
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