Colombia’s Monetary Policy is Tight Enough to Quell Inflation, Central Banker Says

(Bloomberg) -- Colombia’s monetary policy stance is tight enough to bring the fastest inflation in nearly a quarter century down to its target range by the end of 2024, according to a top central banker.

Most Read from Bloomberg

After raising its benchmark interest rate by 11 percentage points over the past year and a half, the risks of a sharp economic slowdown are now greater than the threat of faster inflation, co-director Mauricio Villamizar said in an interview.

“We are now thinking that we’re at a sufficiently contractive monetary policy stance to reach the target in the medium term,” Villamizar, a former head of the central bank’s economics research department, said Wednesday. “This doesn’t necessarily mean that we’re done hiking, or that we can rule out reacting to unexpected shocks.”

Colombia’s central bank surprised most economists in January by delivering a smaller-than-expected hike of three quarters of a percentage point, taking its key rate to 12.75%. It was the latest move in a record monetary tightening campaign launched in response to what Villamizar described as a “once-in-a-lifetime” set of inflationary shocks.

Traders are now split over whether the bank will halt rate rises at its March 30 policy meeting, following Brazil and Chile, or whether it will lift rates for a 13th straight meeting.

Monetary Lags

Villamizar said he expects economic growth to slow to between 0% and 1% this year, down from 7.5% in 2022, as the economy feels the impact of last year’s rate hikes.

“We do see clear signs of a marked slowdown in domestic activity since the last quarter of last year,” Villamizar said. “You can actually see that very clearly in imports, consumption and banking credit, for example.”

Read more: Colombia’s Growth Data Shows Economy Is Worse Off Than Thought

Monetary policy affects output after a lag of about 9-12 months, he said. This means that the bank’s actions in June and July last year, when it raised its policy rate by 1.5 percentage point at two consecutive meetings, are only now beginning to take effect.

A “monotonous path” for interest rates, rather than stops and starts, is generally preferable to avoid the perception of erratic moves, he added.

Villamizar said inflation is at the beginning of its convergence to the target, and that he expects annual consumer price rises to slow to between 8% and 9% by the end of this year, from 13.3% last month.

Colombia targets annual inflation of 3%, plus or minus 1 percentage point. Food price inflation, which is currently 24%, may be back in single digits by the end of the year, he added.

“We have seen some cautiously optimistic signs, but it might be too soon to celebrate,” he said.

Colombian President Gustavo Petro has repeatedly criticized the bank’s interest rate rises, saying they cause unnecessary damage to the economy, while failing to address the root causes of inflation.

Petro has proposed measures such as fertilizer subsidies and price caps on utility bills as alternatives. The president’s attempt to take control of the regulatory commissions that set prices for utility bills was overruled by a court this month.

Read more: Colombia Slows Key Rate Rises and Signals Cycle Near the End

Villamizar said the central bank continues to enjoy high credibility, even though it’s on track to overshoot its inflation target for a third straight year.

“We’ve received multiple inflation shocks and very persistent shocks, so that’s different from basically anything that we’ve seen in the past,” he said. “But as long as people know that we are doing what’s in our power to ensure this convergence, then having three consecutive years missing the target is not going to risk the credibility that we need.”

(Adds comment from Villamizar in 10th paragraph. A previous version of this story corrected Villamizar’s former job title in 3rd paragraph.)

Most Read from Bloomberg Businessweek

©2023 Bloomberg L.P.