(Bloomberg) -- A day after Colombia’s president accused the central bank of economic sabotage for its refusal to cut interest rates, bank Governor Leonardo Villar said that dealing with political pressure is “part of the job.”
“The bank has been attacked and asked to undertake different actions at many points in history,” Villar said Tuesday, in an interview in Bogota. “But what everybody knows is that the bank has always acted in the interests of the nation and not responded to these types of requests.”
On Monday, policymakers held their benchmark rate unchanged at 9.5% for a second straight meeting, citing accelerating inflation and the widest fiscal deficit since the pandemic.
In a post on X after the decision, President Gustavo Petro accused Villar and his colleagues of trying to torpedo economic growth to help the conservative opposition. Villar said that other presidents have criticized the bank from time to time, but the institution has never been deflected from its goal of ensuring price stability.
Villar said the pace of future interest rate cuts will depend on “how rapidly we see our inflation converging, and the main variables that can affect that moving in the right direction.”
He said he hoped the controversy wouldn’t affect the attitude of overseas investors since “central bank independence has a very well-established credibility.”
“It’s understandable that every government has short-term concerns and the board of the central bank has a long-term goal, which is not always consistent with those short-term concerns,” Villar said.
Petro renewed his attack Tuesday, saying that the bank is “failing Colombia.” The president has called for faster monetary easing to boost economic growth.
The bank has disregarded unsolicited advice from all four presidents who have held power in Colombia over the last two decades.
In Brazil, President Luiz Inacio Lula da Silva has also repeatedly attacked the central bank, accusing it of setting interest rates too high and of acting in the interests of financial markets.
Inflation Miss
Colombian inflation will overshoot its target for a fifth straight year in 2025, according to the central bank’s latest survey of economists. Villar said that the phasing out of fuel price subsidies and widespread indexation have made Colombian inflation more persistent than price rises in regional peers such as Peru.
The bank targets annual consumer price rises of 3%, plus or minus one percentage point.
The so-called neutral rate of interest, which neither stimulates nor cools the economy, is “considerably lower” than the current policy rate, Villar said.
“We are conscious that we have a contractionary monetary policy,” he said.
Inflation expectations for 2025 were still within the target range in October, but then the outlook started to deteriorate, Villar said. This led the bank first to slow the pace of interest rate cuts, and then, in January, to suspend them altogether.
“We had several types of uncertainties and concerns about the convergence process of inflation,” Villar said. “One of them of course is what’s happening with US policy and tariffs that may create conditions of higher inflation in many other countries.”
“In a context of so much uncertainty, caution is always welcome,” he added.
An Unwelcome Surprise
Annual inflation will slow to 4.5% by the end of the year, from 5.3% in February, according to the central bank’s survey of economists.
Villar said that last year’s wider-than-expected fiscal deficit, equivalent to 6.8% of gross domestic product, was another unwelcome surprise for policymakers. This also contributed to the central bank adopting a wait-and-see approach while this gets addressed, he said.
The nation’s currency and sovereign bonds weakened last month after the unexpected departure of Finance Minister Diego Guevara, who had called for spending cuts to narrow the fiscal gap. Investors are concerned that his successor, Germán Ávila, a long-time Petro ally, will fail to do enough to rein in the deficit.
The bank expects the economy to expand 2.8% this year, which is close to its long-run potential growth rate of about 3%, Villar said. However, since the economy is currently operating below capacity, it could grow faster than this pace for a time, he added.
Falling Birth Rate
Colombia’s falling birth rate means that the work force is no longer growing at its former pace, contributing to a drop in the potential growth rate in recent years, according to Villar.
Only 445,000 babies were born in Colombia last year, down 33% from a decade earlier, the national statistics agency reported last month.
Low rates of investment may have also dampened the potential growth rate, he added.
For years, policymakers expressed concern about the size of the current account deficit, but Villar said it is now “a much less important concern” after it narrowed sharply to 1.8% of GDP last year, from 6% in 2022.
Remittance flows have become a key source of foreign currency to Colombia in recent years, rising to a record of around $12 billion last year. Villar said he didn’t expect this to be greatly affected by changes in US migration policy under President Donald Trump.
“What is in danger is the flow of new migrants to the US,” he said. “The flow from people who are already established there shouldn’t change much.”
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