A top Colombian policy maker says he wants to see signs the fiscal deficit is narrowing and inflation on a decisive downward path before voting to halt interest rate rises.
(Bloomberg) — A top Colombian policy maker says he wants to see signs the fiscal deficit is narrowing and inflation on a decisive downward path before voting to halt interest rate rises.
“Inflation needs to reach a turning point, but a sustained one,” central bank co-director Jaime Jaramillo-Vallejo said Thursday, in an interview in Cartagena. “And I would also like to see that fiscal policy is going in the right direction.”
Rising government revenues will be a sign that fiscal policy is helping rein in inflationary pressure, he said, speaking on the sidelines of a banking conference.
Jaramillo-Vallejo and his colleagues on the central bank’s seven-member board last month slowed the pace of monetary tightening and signaled that interest rate rises are nearing an end as the economy’s growth prospects dim. Jaramillo-Vallejo says that doesn’t necessarily mean the hiking cycle is over yet.
While the real interest rate is positive, which is necessary for inflation to slow, “that doesn’t mean we’re going to stop there,” he said.
The bank has also lifted borrowing costs to help shore up the currency, even though it doesn’t target any specific exchange rate, he added.
Emerging Market Currencies
The Colombian peso has weakened more than 18% over the past year, the worst performance among major emerging market currencies after the Argentine peso and Turkish lira. President Gustavo Petro’s promises to end new oil exploration contracts and his proposed changes to the pension system have made some investors nervous, contributing to the selloff.
The bank raised its key rate to a 23-year high of 12.75% last month, from 1.75% when policy makers started tightening policy a year and half ago.
Congress last year passed a tax reform that looks to generate additional annual revenue of about $4 billion dollars, to help fund Petro’s plans to increase social spending and also keep the fiscal deficit in check. Investors are now waiting to see if part of the increased revenue will indeed go toward cutting the deficit.
Colombia’s annual inflation rate accelerated to 13.25% last month, its fastest pace since 1999, and far exceeding the 2% to 4% target range.
Recent data that point to slowing economic activity may mean that inflation will soon reach the point where it starts to slow toward its target, Jaramillo-Vallejo said.
“We may be reaching a turning point,” he said.
(Updates with peso move in seventh paragraph.)
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