Inflation would not meet the goal in 2024 and would affect monetary policy

The general manager of the Bank of the Republic, Leonardo Villar, said that 2024 will be the fourth year in which the inflation goal will be missed and pointed out that although inflation has been falling, it is still well above said objective between 2% and 4% with a specific figure of 3%.

Likewise, he pointed out five key aspects and the reasons for caution within the task of carrying out a sustainable and lasting rate policy.

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The first consideration he mentioned has to do with the importance of recognizing that short-term impacts on demand “and the productive activity of the contractionary monetary policy that we were forced to have in the last two and a half years have been painful, as are usually the processes of macroeconomic adjustment when inflation goes off course and important macroeconomic imbalances are generated” .

Said “The learning that we must draw is about the importance of adopting policies to prevent these imbalances and deviations of inflation from its target from occurring again in the future.”

The second consideration that he mentioned is that the most painful phase of the adjustment is behind us and thanks to the fact that the imbalances have receded and inflation is reacting downwards, The debate today is about the pace of policy relaxation. “In fact, the information that we were able to review at the last March Meeting allowed us to accelerate the pace of reduction of policy interest rates with respect to what we saw as viable in the December and January sessions. Furthermore, as we saw at the beginning of this intervention, the reduction has been seen to an even greater degree in the interest rates that directly affect the different market actors, such as the interest rates on credits, those on term deposits of the banks and those of the TES for medium and long terms.”

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The third consideration is that despite the downward trend in inflation, it continues strongly above the goal, as explained by Villar.

“Certainly, we have lowered inflation by six percentage points compared to the very high levels reached a year ago, but we are still more than four percentage points away from reaching the 3% goal. This goal was set several years ago and is not only similar to what many countries similar to ours have, but is consistent with the possibility of having interest rates at sustainably low levels. It should be remembered that several countries in the region that have been able to significantly lower their interest rates in the recent period, such as Brazil, Chile, Peru, Uruguay or Costa Rica, already have inflation levels below 5% and in some cases within the target range”, Villar pointed out.

The fourth consideration that he expressed is the one that favors caution and has to do with the inflation expectations and credibility in the Bank's goal. For the reduction in policy interest rates to be perceived as sustainable, it requires that it be consistent with lower inflation expectations and with the fulfillment of the goal within the planned period of 12 to 18 months announced by the Board last month. November; This means that the goal is met before mid-2025.

Villar said inflation expectations implicit in market prices for public debt have been adjusted significantly downward, but so far the adjustment has been insufficient. Even when the so-called Break Even Inflation (BEI) is adjusted for liquidity and inflation risk premiums, the implicit expectations that we saw in March were above 5% for terms of one year and 4.7% for terms of two years .

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The fifth consideration he expressed relates to uncertainty. Maintaining caution will be essential to avoid situations in which the probabilities of having to slow down or even reverse later the process of relaxing monetary policy increase in the event of unexpected situations, such as those that could arise due to changes in conditions. international financial institutions, the risk appetite of national or international investors or the global geopolitical environment.

Villar said the uncertainty on these fronts is, however, very great and decisions must take into account the possibilities that external factors will change in the future.

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HOLMAN RODRÍGUEZ MARTÍNEZ
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