Latin America needs high rates for longer, says Colombia’s central bank

There is consensus among those responsible for the monetary politics of the region in which interest rates will have to remain high “for some important time” to guarantee that inflation decelerates decisively, said the general manager of the Bank of the Republic, Leonardo Villar.

The main economies of Latin America are likely to maintain a restrictive monetary policy for an extended period, after exceeding their inflation targets for several consecutive years, according to the head of Colombia’s central bank.

There is a consensus among policy makers in the region that interest rates will have to remain high “for some important time” to ensure that inflation slows down decisively, the general manager of the Central Bank said in an interview on Wednesday. the Republic, Leonardo Villar.

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In the Colombian case, BanRep it will miss its targets in 2021, 2022 and 2023, and price increases will only cool to the target range at the end of 2024, Villar said in Bogotá.

This “it makes it important to maintain a relatively restrictive, contractive policy”said. “It does not mean that, to the extent that inflation falls, the nominal rate cannot be lowered, but with great, great caution, and only when there is enough peace of mind that the convergence process is happening.”

Consumer prices soared across all emerging markets from 2021 on rising costs of major raw materials, while consumer demand picked up as supply chains continued to be disrupted by the Covid-19 pandemic. Throughout the region there have been “unprecedented” price increases since inflation targeting was introduced in Latin America, Villar said.

Brazil, Mexico, Peru, Chile and Colombia They adopted inflation targeting regimes in the 1990s or 2000s.

Restore credibility

Persistently high inflation rates since the pandemic may also be undermining the confidence enjoyed by policymakers, Villar said.

“It has possibly forced monetary policy to be more restrictive than it would be if there were more credibility”he added.

Problems of excess demand, rapidly rising food prices and high levels of indexation are common in the region’s major economies, but are currently more pronounced in Colombia, Villar said.

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Colombia’s annual inflation rate accelerated to 13.25% last month, its fastest pace since 1999. The Central Bank expects it to peak sometime in the first quarter, Villar said.

However, core inflation is expected to continue to accelerate during the first half of the year, partly due to widespread price indexing, according to Villar.

Near the end

The central bank raised its benchmark interest rate to 12.75% last month, up from 1.75% when it began tightening in 2021.

At last month’s meeting, BanRep said the interest rate was nearing the point where it would be high enough to bring inflation back to its 3% target over the medium term.

Villar said that this does not mean that interest rates cannot rise further, but rather indicates that the end of the cycle is near.

Some economists have speculated that the bank was thinking of easing monetary tightening months ago, but was repeatedly hit by unexpected bad news on inflation.

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Asked about it, Villar said: “That interpretation is valid.”

“There were negative elements, in particular, the impact of the strong depreciation that we had between September and November of last year, and the magnitude of the salary adjustments”held. “Starting in December, we started to see a much more favorable trend. For example, the behavior of the exchange rate and a more benign international environment that gives us a bit more peace of mind”.

Petro “respectful”

Investors were alarmed last year by President Gustavo Petro’s criticism of central bank interest rate hikes. Petro has said that inflation should be combated with measures to lower food prices, such as fertilizer subsidies.

Petro’s remarks contributed to a sell-off of the country’s bonds and currency, but Villar said any fears investors might have about the bank’s independence would be unwarranted.

“President Petro, like all former presidents at the time, has made statements, has expressed completely legitimate concerns, but has been very respectful of the bank’s autonomy”Villar pointed out.

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In Brazil, the president Luiz Inacio Lula da Silva reiterated his call that the central bank lower interest rates and even questioned whether his independence serves the national interest.

In Colombia, the central bank has ignored the unsolicited advice it has received from all four presidents over the past 20 years.

Villar, 63, studied at the London School of Economicsand took office in 2021.