By Nelson Bocanegra and Carlos Vargas
BOGOTA, March 31 (Reuters) – Colombia’s central bank raised the benchmark interest rate for the second consecutive time on Tuesday, to 11.25%, as the country’s finance minister said the government has withdrawn from the bank’s board amid a spat between policymakers over how best to curb inflationary pressures.
The 100-basis-point increase, which Finance Minister German Avila said was “disproportionate,” was backed by four policymakers on the seven-member board, board chief Leonardo Villar said, while two policymakers voted for a cut of 50 basis points and one for a hold.
Avila, who represents the government on the board, said the government withdrawal would endure until policymakers understand the need for coherence between their decisions and the economic reality of Colombia, that a rise in the rate would lead to an uptick in inflation and that the board is too concerned with the needs of the financial sector and not of average Colombians.
“The ministry has made the decision to withdraw from the board meeting being held today by the central bank and to clearly establish a significant distance between the government and the central bank. This decision will only be reconsidered to the extent that the central bank understands that there must be coherence with the country’s economic reality and the country’s social reality,” Avila said in a press conference at his ministry’s headquarters. He did not attend the normally scheduled press conference with Villar.
Villar told journalists at the board’s press conference that he rejects the accusations by Avila that board members were acting in their own interests and that they are doing everything they can to return inflation to its long-term 3% target next year.
He added that the government’s withdrawal from the board goes against constitutional norms.
Avila and his boss, President Gustavo Petro, have for years protested efforts by policymakers to hold and raise the interest rate, arguing rate cuts would better serve the economy. Policymakers including Villar have rejected the political pressure, saying the board must be allowed to act independently.
Locally, consumer prices have risen on the back of a 23% increase in the minimum wage, as well as higher government spending. An increase in the rate could also be meant to pre-empt the impact of the conflict in the Middle East on fuel prices, analysts, a majority of whom predicted the 100-point jump in a recent Reuters poll, have said.
Colombia notched annual inflation of 5.29% for February, exceeding the bank’s long-term target of 3%.
“Total inflation expectations remain elevated, although they show a marginal decline,” the board said in a statement on its decision read by Villar.
“The war in Iran jeopardizes growth and stability in the global economy. Its effects on the Colombian economy would be mixed. On the one hand, terms of trade would improve thanks to higher oil prices. On the other, it would make basic goods such as gas and fertilizers— which the country needs to import in significant quantities— more expensive. This could intensify inflationary pressures this year.”
(Reporting by Nelson Bocanegra and Carlos Vargas in Bogota, Writing by Julia Symmes Cobb, Editing by Matthew Lewis, Deepa Babington and Nick Zieminski)
