Colombia is trying to cut interest rates at a pace that does not surprise the marketsdoes not trigger destabilizing capital outflows or jeopardize the goal of reaching the inflation target range by mid-2025, the central bank chief said.
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Fastest consumer price increases among peers and above-target inflation expectations are “elements of concern” that demand prudence on the part of the authorities, said Governor Leonardo Villar. But if inflation outlook improvesthe bank could accelerate the pace of monetary easing.
“If these expectations are in line with the target, and if the bank's own economists' projections are consistent with the target, it will be easier to make more significant adjustments to the interest rate,” Villar said Thursday in Cartagena, in an interview on the sidelines of a pension fund industry conference.
The central bank cut its key interest rate by half a percentage point to 12.25% last month, although two of the seven board members voted in favor of a larger reduction. According to Villar, authorities try not to take financial markets by surprise by setting interest rates for fear of triggering exchange rate volatility.
“Big surprises can generate nervousness and significant changes in the direction of capital flows”he claimed.
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Movements “totally outside the ranges considered by markets and analysts” could generate such reactions, he added.
The peso has strengthened 15% in the last 12 months, the largest gain among emerging markets. Villar said the recovery of the currency after reaching a historic low in 2022 and the increase in the price of oil explain the measure, while the impact of Colombia's high interest rates is low.
Interest rates
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Annual inflation slowed to 7.4% in March, almost half less than a year earlier. The central bank is targeting inflation of 3%, plus or minus one percentage point.
Food and energy prices are moving in line with bank forecastsbut authorities are still analyzing the full effect of the dry weather caused by the El Niño climate phenomenon, he said.
The bank is usually careful to stay out of politics. But this month it issued a rare warning that statements by President Gustavo Petro's government risk undermining investor confidence.
These were related to the proposals of an assembly to change the constitution, which would possibly affect the way the bank operates, he said. However, those fears have since been allayed, he added.
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