Ex-Central Bank Officials See Higher Rates: Colombia Market Talk

Oscar Medina and Andrea Jaramillo
·4 min read

(Bloomberg) -- Colombia needs to raise interest rates to the highest level since 2001 to get inflation back under control, according to former central bank officials who spoke with Bloomberg.

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The bank is likely to lift its policy rate by one percentage point, to 11%, this month, with another hike probable at its December meeting, said Carolina Soto who was a central bank co-director until last year.

The bank surprised analysts last week by slowing the pace of rate rises. Soto said that she herself had been surprised that there were no dissenting voices on the board calling for a bigger move.

“Inflation is steepening, expectations are growing higher and higher, internal demand keeps pressuring, international financial conditions are getting tighter,” Soto said. “A new hike is coming.”

Soto was one of three participants in “Colombia Market Talk,” carried out Oct. 5 at Bloomberg’s Bogota office. The other attendees were:

  • Munir Jalil, Andean chief economist at BTG Pactual

  • Andres Velasco, head of Colombia’s independent fiscal rule committee

All three are former central bank employees, though Velasco declined to speculate about the future path of interest rates.

Unwelcome Surprise

Annual inflation accelerated more than expected in September to a 23-year high of 11.4%, led by soaring food prices. This unwelcome surprise means that inflation expectations will continue to rise, Soto said.

“These inflation surprises are killing us,” Jalil said. “We keep seeing, systematically, inflation numbers that are worse and worse.”

Jalil said he expects inflation to peak this month at more than 12%, while Soto believes price rises reached their high-point last month.

Jalil predicts that the bank will raise its key rate to 11.5% or 12% by the end of the year, while Soto’s forecast is 11.5%.

The government started to trim its gigantic gasoline subsidies this month. This measure may add half a percentage point to inflation by the end of the year, though this may be offset by planned cuts in electricity bills, according to Jalil.

A big part of the inflationary impact of gasoline price hikes may be seen by mid-2023, said Velasco, who heads the committee that monitors whether the government is complying with its fiscal targets.

20% Minimum Wage Hike

One risk for inflation is the minimum wage increase which will take effect from January. Jalil forecasts that the leftist administration of President Gustavo Petro will set the wage increase at 20%, while Soto predicted a 15% rise.

The monthly minimum wage is currently equivalent to about $220 per month.

Petro recently said that Colombia needs to buy millions of hectares of land for farmers, which could cost an estimated 60 trillion pesos ($13 billion).

Petro’s comments stoked fear of increased debt among some investors, who were already showing signs of nerves. The cost of insuring the nation’s debt with Credit Default Swaps is now higher for Colombia than it is for Brazil and Mexico, whereas at the start of 2020 it was lower. This is an indication of investor nerves, especially since Brazil has a lower credit rating than Colombia’s, Jalil said.

Foreign credit markets are very difficult for Colombia to access at the moment, due to high borrowing costs, Jalil said. 2022 is set to be the first year for decades in which Colombia hasn’t issued bonds overseas, Velasco said.

Soto said she was pleased by the government’s pledges to comply with its debt targets. In order to comply with the fiscal rule, the government needs to cut debt to 55% of gross domestic product from more than 60% currently.

“Fiscal responsibility has been common in Petro’s speeches, starting with the inauguration,” said Soto. “And that gives me reassurance.”

Strong economic growth this year, as well as the government’s bill to raise taxes, will boost revenue, according to Velasco.

Colombia’s economy will grow 7.8% this year, according to the central bank, which would be the fastest among major economies in the Americas. But that pace will slow to just 0.7% in 2023.

The best strategy to generate space for extra spending is to cut debt, and with it the large sums the government spends paying interest, Velasco said.

“Of every 10 pesos of fiscal revenue, 3 are going to pay interest,” Velasco said.

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