Colombian central bankers defend low interest rates

Two out of the seven Colombian Central Bank’s board members separately said on Wednesday they would rather have low interest rates for while, strengthening the market feeling about the foreseeable future.

Juan Jose Echavarria and Carlos Gustavo Cano, who generally disagree on monetary policy, said in a lecture and a column in a local newspaper, respectively, that the current policy of historic low rates must continue.

Echavarria said he would prefer to keep interest rates low for the whole of 2010. “Keeping rates low for the whole year would be great news for the country, because it would help the economic recovery,” he said.

The Central Bank’s board meets once a month to discuss monetary policy and its seven members vote to set the rate. Currently, the rate stands at 3.50%, a record low, after the bank reduced its rate gradually during 2009 from 10%.

Echavarria opposes further rate cuts as the bank’s inflation target for this year, at between 2% and 4%, is already low and excessively low rates would endanger the goal.

He added the inflation will very likely end the year within the target range.

In a column published earlier in local newspaper Portafolio, Cano said he agreed with Echavarria, though he added that monetary policy is powerless to contain price increases when caused by supply problems or international commodity price swings.

As the Colombian economy entered recession in early 2009, the Central Bank gradually lowered the interest rate as inflation was going down, dragged by contracting consumer demand.

Annual inflation in 2009 was the lowest on record at 2%.

In late January, the board kept its rate unchanged, citing still-falling inflation in December, and the need to keep rates low to boost consumer demand and economic growth. The board said there were signs the economy is on the path to recovery, though it insisted the monetary stimulus was still needed.

Inflation data for January showed transportation costs and food prices pushed prices upwards, though inflation is still at a low 2.10%.

Prior to the monetary loosening cycle, the bank had hiked its rate to 10% from 6% in late 2005 as inflation took off in 2007 and 2008.

Back then, Cano and Echavarria, who already sat on the board, took opposite stances. Cano opposed rate hikes as he was concerned about the impact on Colombian industries’ costs. Echavarria, on the contrary, used to stress the importance of keeping inflation under control in his public comments.

The other board members generally lean towards one or the other options when they vote.

There seems to now be a consensus to keep rates low, which will surely strengthen the market’s expectations.

According to the Central Bank’s monthly survey, market players expect the central bank’s benchmark interest rate will stay unchanged until at least May and to end the year at an average 4.57%. (Inti Landauro / Dow Jones)

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