Central Banker Sees Risks for Colombia in Rushing to Cut Rates Too Soon

Colombia’s central bank could put its credibility at risk if it rushed to cut interest rates prematurely, according to its newest board member.

(Bloomberg) — Colombia’s central bank could put its credibility at risk if it rushed to cut interest rates prematurely, according to its newest board member. 

“There’s a big risk in easing early then having to reverse course,” co-director Olga Lucia Acosta said Tuesday, in her first interview since she was appointed by President Gustavo Petro last year. 

Brazil, Peru and Chile are all easing monetary policy as inflation cools across Latin America. But, in Colombia, consumer price pressures have dropped more slowly than expected over the last six months, and the bank needs to ensure that inflation is back in its target range by the end of 2024, Acosta said, speaking at the bank’s Bogota headquarters. 

The bank held its key interest rate at 13.25% at its last meeting, defying pressure from Petro and Finance Minister Ricardo Bonilla, who are both calling for a cut as economic growth slows sharply. Colombia’s rate is the highest among regional peers. 

“We have to stick to the task,” Acosta said. “We have to wait for better results, and I believe they will be there soon.” 

The bank also needs “greater security” on inflation expectations, even though these are moving in the right direction, she said. Economists surveyed by the central bank now forecast the first rate cut in December. 

“We are starting to see that the requirements are coming together, with inflation slowing for six months and core inflation, finally, starting to cool,” Acosta added. 

The potential effect on food and energy prices from the El Nino weather phenomenon, and a high minimum wage increase in 2024 are among the main risks, Acosta said. 

Inflation slowed to 10.99% in September, which is by far the highest rate among major inflation-targeting economies in the region. The central bank targets consumer price rises of 3%, plus or minus one percentage point. 

Read more: Colombia Finance Chief Sees Swift Key Rate Cuts to 8% by 2024

Paris Education

Acosta, 66, an expert in development economics, is so far the only one of the bank’s co-directors to have been appointed by Petro. By naming a well-known economist, rather than an ideologue close to himself, the president calmed worries that his administration might be a threat to the bank’s independence. 

Acosta holds a master’s degree in Development Economics from the Paris 1 Panthéon-Sorbonne University. Before joining the central bank’s board, she worked at the United Nations Economic Commission for Latin America and the Caribbean. 

Deteriorating Growth

The central bank expects Colombia’s economy to expand at a rate of just 1% this year and in 2024, which is a concern, she said. Retail sales and manufacturing output suffered worse-than-expected contractions in August, as evidence mounts of a steep slowdown. 

Despite the deterioration, the economy is still probably operating above its sustainable potential, after its extraordinary expansion over the last two years, she said. Output will probably be back in line with the economy’s capacity by the end of the year, she added. 

After the pandemic slump, output expanded 11% in 2021 and 7.3% last year. Uncertainty over the economic outlook, more than high borrowing costs, is the most important factor deterring investment, Acosta said, citing the board’s regular meetings with business leaders across the country. 

Investment Drop

Colombia’s potential growth rate, or the pace at which it can sustainably expand without inflation accelerating, seems to have fallen, perhaps due to a drop in private investment, she said. 

Acosta said she’s particularly concerned about the slow pace at which poverty is falling in Colombia. Nearly four in ten Colombians still live in poverty and the number in “extreme” poverty, who are unable to feed themselves adequately, rose slightly to 13.8% last year, even as the economy registered rapid growth. 

Read more: Peru Cuts Key Rate for Second Month After Recession Deepened

The main contribution the bank can make on this front is ensuring stable prices, she said. 

One hypothesis that might explain the recent strength of Colombia’s labor market is the subsidies provided during the pandemic to promote job creation, she said. After taking government aid to create jobs, especially for women and the young, businesses kept those workers on, since employee rotation is expensive, she said. 

The unemployment rate fell to 9% in August, its lowest since 2018.

–With assistance from Robert Jameson.

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