Colombia’s Top Central Banker Signals Rate Cuts But No Surprises
(Bloomberg) -- Colombia is trying to cut interest rates at a pace that won’t surprise markets, trigger destabilizing capital outflows or jeopardize the aim of hitting the inflation target range by mid-2025, the head of the central bank said.
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The fastest consumer price rises among peers, and above-target inflation expectations are “elements of concern” that call for prudence from policymakers, Governor Leonardo Villar said. But if the inflation outlook brightens the bank might accelerate the pace of monetary easing.
“If these expectations adjust toward the target, and if the projections of the bank’s own economists are consistent with the target, more significant adjustments in the interest rate become easier,” Villar said Thursday in Cartagena, in an interview on the sidelines of a conference of the pension fund industry.
The central bank lowered its key interest rate half a percentage point to 12.25% last month, though two of the seven board members voted for a bigger reduction. Policymakers try not to blindside financial markets when setting interest rates for fear of triggering exchange rate volatility, according to Villar.
“Big surprises can generate nervousness and significant changes in the direction of capital flows,” he said.
Movements “totally outside the ranges considered by the markets and by analysts” might generate such reactions, he added.
The peso has strengthened 15% over the last 12 months, the biggest gain among emerging markets. Villar said that the currency’s recovery from hitting a record low in 2022 and a rising oil price explain the move, while the impact of Colombia’s high interest rates is low.
Food and Energy
Annual inflation slowed to 7.4% in March, down nearly half from a year earlier. The central bank targets inflation 3%, plus or minus one percentage point.
Food and energy prices are moving in line with the bank’s forecasts, but policymakers are still analyzing the full effect of dry weather caused by the El Niño weather phenomenon, he said.
The bank normally takes care to stay out of politics. But this month, it issued a rare warning that statements by the government of President Gustavo Petro risk undermining investor confidence.
These were related to the proposals of an assembly to change the constitution, possibly affecting the way the bank operates, he said. However, those fears have since dissipated, he added.
Read more: Colombia Central Bank Cites Politics in ‘Cautious’ Key Rate Cut
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