(Bloomberg) — Latin America’s major economies are likely to keep monetary policy tight for a prolonged period after overshooting their inflation targets for years in a row, according to Colombia’s top central banker.
(Bloomberg) — Latin America’s major economies are likely to keep monetary policy tight for a prolonged period after overshooting their inflation targets for years in a row, according to Colombia’s top central banker.
There’s a consensus among the region’s policymakers that interest rates will need to stay high “for an important amount of time,” to ensure that sticky inflation slows decisively, Governor Leonardo Villar said in an interview Wednesday
In Colombia’s case, the central bank will have missed its goals in 2021, 2022 and 2023, with price rises only cooling to the target range in late 2024, Villar said in Bogota.
“This makes it important to keep policy relatively restrictive, contractive,” he said. “That doesn’t mean that nominal interest rates can’t fall as inflation slows, but with great caution, and only when there’s a lot of tranquility that the process of inflation convergence is happening.”
Consumer prices soared across emerging markets from 2021 as the cost of key commodities rose, and consumer demand rebounded while supply chains were still disrupted by the Covid-19 pandemic. The current region-wide price spikes are “unprecedented” since inflation-targeting was introduced in Latin America, Villar said.
Brazil, Mexico, Peru, Chile and Colombia all adopted consumer price targeting in the 1990s or 2000s.
Restoring Credibility
Persistently elevated inflation rates since the pandemic may also be denting the confidence that policymakers enjoy, 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, a jump in food prices and high levels of indexation are common to the region’s main economies, but are currently more pronounced in Colombia, Villar said.
Read more: Colombia Boosts Minimum Wage by 16%
Colombia’s annual inflation rate accelerated to 13.25% last month, its fastest pace since 1999. The central bank expects it to peak at some time in the first quarter, Villar said.
Core inflation, however, is expected to keep accelerating during the first half of the year, partly because of widespread price indexation, according to Villar.
Nearing the End
The central bank raised its benchmark interest rate to 12.75% last month, up from 1.75% when it started tightening policy in 2021.
At last month’s meeting, the bank said that the interest rate was nearing the point at which it would be high enough to get inflation to back to its 3% target over the medium term.
Villar said that this doesn’t mean that interest rates can’t go higher, but signals that the end of the cycle is close.
Some economists have speculated that the bank was thinking of winding down monetary tightening months ago, but was repeatedly hit by unexpectedly bad inflation news.
Asked about this, Villar said, “That interpretation is valid.”
“There were negative elements, in particular, the impact of the strong peso depreciation that we had between September and November and the magnitude of salary adjustments,” he said. “Since December, we’ve begun to see a much more favorable trend. The behavior of the exchange rate and a more benign international environment give us a little more peace of mind.”
‘Respectful’ Petro
Last year, investors were alarmed by President Gustavo Petro’s criticism of the central bank’s interest rate rises. Petro has said that inflation should instead be tackled by measures to bring down food prices, such as fertilizer subsidies.
Petro’s remarks contributed to a selloff in the nation’s bonds and currency, but Villar said that any fears investors may have about the bank’s independence would be unjustified.
“President Petro has expressed his concerns, as did all his predecessors, which is totally legitimate, but he has been very respectful of the bank’s autonomy,” Villar said.
In Brazil, President Luiz Inacio Lula da Silva reiterated his call for the central bank to lower interest rates and even questioned whether its independence serves the national interest.
Read more: Lula Asks Central Bank Chief to Reflect on the Economy, His Role
In Colombia, the central bank has disregarded unsolicited advice it’s received from all four presidents over the last 20 years.
Villar, 63, studied at the London School of Economics, and took office in 2021.
–With assistance from Maria Eloisa Capurro.
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