Figure 1: Selected Latin American exchange rates, percentage change against the US dollar: June 2021 compared to June 2023

Extract A: Can Colombia's central bank halt the peso's slide?

At an annual rate of 11.5%, Colombia's inflation remains stubbornly high, driven by high global food and energy prices. This poses a major policy dilemma for the central bank (Banco de la República), as the Colombian peso lost nearly 22% of its value against the US dollar over the two-year period ending June 2023. The central bank faces intense pressure; while it may want to pause interest rate hikes to support a slowing domestic economy and high unemployment, the risk of a currency spiral remains elevated. Colombia's public sector and major state-owned enterprises (such as the oil firm Ecopetrol) hold substantial debts denominated in US dollars. Consequently, the government and the central bank are highly sensitive to sharp depreciations that threaten fiscal stability and raise the domestic cost of servicing foreign debts, while also trying to retain foreign direct investment.

High consumer prices have severely strained household budgets, particularly due to the high import content of agricultural inputs like fertilizers, which has driven up food costs. While some exporters benefit from a weaker currency, some policymakers prefer lower borrowing costs to stimulate credit-led domestic growth. However, economists warn that further depreciation could trigger capital flight and harm sovereign credit ratings, especially with real GDP growth projected to slow to a modest annual average of 1.2% over the medium term.