New Colombia Central Banker Says Lower Rates May Deter Inflows

Colombia must take care not to drive away foreign investors or jeopardize financial stability at a time when the government’s funding needs are growing, according to one of the central bank’s new co-directors.

That’s one of the arguments against another cut to the bank’s key interest rate, which is currently at a record low, said Bibiana Taboada, who joined the bank’s board last month. At the same time, low inflation expectations, weak growth and a high jobless rate could all become arguments for more stimulus, she said.

New Colombia Central Banker Says Lower Rates May Deter Inflows

“Balancing such trade-offs and, quite importantly, aiming at a sustainable and predictable path in monetary policy that provides a clear and adequate message to all market participants will be fundamental,” Taboada said, in reply to written questions.

READ MORE: Q&A with co-director Bibiana Taboada (Spanish)

With the economy still struggling to recover from the deepest slump in its history, the seven-member committee has split at its last two meetings. The majority voted to leave interest rates unchanged at 1.75%, but two board members argued that the lowest inflation rate in six decades creates room to cut interest rates further.

Either way, there is a is a “wide consensus” on maintaining an expansionary position, Taboada said.

Greatest Threat

The greatest threat to the recovery is the risk that infections remain high and delay the resumption of normal life, Taboada said.

“If people can’t return to their workplace in healthy sanitary conditions, it would be very hard to achieve growth in the short and medium term,” she said.

New Colombia Central Banker Says Lower Rates May Deter Inflows

Retail sales and manufacturing output fell at the start of the year after a second wave of Covid-19 infections around the Christmas holiday led Bogota and other major cities to reimpose curbs.

The economy is set to expand by about 4.5% this year, but won’t return to its pre-pandemic level until the end of 2022, according to the bank’s forecasts. Last year, output shrank 6.8%.

Poverty Jumps

Some estimates show that poverty in Colombia jumped by as much as 40% last year, to levels not seen in a decade, said Taboada, an expert on anti-poverty programs who has worked at the World Bank and the Inter-American Development Bank.

The central bank can do its part to help fight poverty, she says, including by promoting payment systems that facilitate financial inclusion, and by making social issues part of policy discussions.

Taboada’s appointment to the bank was widely criticized as damaging to the institution’s independence given that her mother, Alicia Arango, recently served as Interior Minister and is close to President Ivan Duque. Taboada says that she herself has known Duque for more than 15 years, since they both worked together at the IDB.

“I am sure that he nominated me to this position because he knows my professional career, trusts my judgment, and considers that I can provide a fresh view to the board, from the social and financial inclusion perspectives,” she said, adding that she will work “with rigor and independence.”

Taboada will attend her first policy meeting later this month, as will new co-director, Mauricio Villamizar, who has spent most of his career in the bank’s economics team. Former official from the International Monetary Fund, Jaime Jaramillo, was also named co-director in February.

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