Brazil’s Monetary Policy Is Example to Avoid, Colombian Central Banker Says

(Bloomberg) -- Mistakes made by Brazil’s central bank, which was among the first in the region to slash interest rates and may now need to lift them again, provide a cautionary tale for Colombia, according to one of the Andean nation’s top policymakers. 

“Brazil today is the example not to follow,” Colombian central bank co-director Mauricio Villamizar said during a presentation. “Brazil hasn’t just interrupted its interest rate cuts, as Peru and Mexico also did, but it’s expected that it will reverse course and start to raise interest rates.”

Villamizar made his comments after warning of the dangers of over-hasty monetary easing. “Rushed” interest rate cuts can have the paradoxical effect of pushing up long-term lending rates, he said at an Aug. 20 event organized by the nation’s Comptroller’s Office.

“If what you want is to have low rates above all for long-term credit, for mortgages, and treasury bonds, then reductions that don’t look sustainable can end up having effects that increase these long-term rates,” Villamizar said.

Brazil’s central bank didn’t immediately reply to a request for comment. 

As inflation slowed toward its target, Brazilian policymakers began slashing their key interest rate in August 2023. But a rebound in inflation, and deteriorating inflation expectations led them to halt these cuts in June with their key rate at 10.5%. 

Traders are now pricing in interest rate rises as early as September, with analysts at some main asset managers also forecasting hikes next month. Gabriel Galipolo, the Brazilian central bank’s monetary policy director, said the bank remains data-dependent with all options on the table at the bank’s September meeting, including a rate increase.

At their last four board meetings, Villamizar and his colleagues have defied pressure from President Gustavo Petro to step up the pace of monetary easing, and have cut their key rate in half percentage-point increments. However, some analysts expect them to accelerate the pace next month, cutting their key rate three quarters of a percentage point, to 10%.  

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