Central Bank Chief Says Colombia Can’t Maintain Current Stimulus
(Bloomberg) -- Colombia’s rapid recovery and growing inflationary pressure mean the central bank will need to pare back the amount of stimulus it’s providing the economy, bank Governor Leonardo Villar said.
“We saw the need to begin reducing the magnitude of stimulus,” Villar said in a presentation Thursday, referring to the central bank board’s discussion in its last policy meeting in July. “That doesn’t mean eliminating stimulus altogether.”
The bank will begin to lift interest rates “gradually”, he said, without specifying when it will start. Analysts surveyed by the central bank are forecasting the first rate increase in more than five years when the board meets Sept. 30.
Central banks across Latin America are raising interest rates, with every major economy in the region now afflicted by above-target inflation. Chile shocked traders last week with its biggest interest rate rise in two decades, and Brazil, Mexico, and Peru have all increased borrowing costs in recent months.
Colombia is the only major inflation-targeting economy in the region that hasn’t yet begun to withdraw the monetary stimulus it deployed after the pandemic hit last year. Villar’s comments signal that it may soon follow suit.
In July, the central bank left its interest rate at a record low 1.75%, saying that the spike in consumer prices was temporary. However, since then annual inflation in August accelerated to 4.4%, above the upper limit of the target range. And Villar acknowledged that inflation expectations have also started creeping up.
“At this moment inflation expectations remain anchored in the sense that economic actors in surveys suggest that inflation is rising temporarily, but that next year it will return back to the target and in subsequent years will remain around the 3% target,” Villar said. “Even though it’s at the margin, those expectations have risen so we need to be very cautious.”
The bank forecasts the economy will grow 7.5% this year following a record contraction in 2020.
Central bank co-director Bibiana Taboada said earlier this week that the bank will try to make rate increases “gradual as far as possible, to maintain the stimulus that the economy still requires,” pointing to the weak labor market.
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