(Bloomberg) -- Investors in Colombia are wrong to fear that President Gustavo Petro’s upcoming changes to the central bank board will hurt its independence, according to a senior policymaker.
Once people join the bank’s policy committee, they always fall in with their constitutional obligation to pursue the 3% inflation target and sustainable economic growth, central bank co-director Bibiana Taboada said.
Petro has to appoint two new central bank co-directors by February, and remove two others. Since he has repeatedly called for faster interest rate cuts, some economists fret that he’ll implement a power grab, appointing people who share his vision and giving the board a dovish tilt.
“Co-directors with different profiles and ideas have been on the board, and it has always worked well,” Taboada said Wednesday, in an interview in Bogota. “That’s because, when you come to the board, you wear the shirt the constitution tells you to wear.”
The powerful influence of the bank’s economic research team, which guides the seven-member board, is another guarantee of independence, Taboada said.
Over recent months, the bank has repeatedly defied pressure from the government to cut interest rates faster. Petro has already named one co-director, as well as the finance minister, who sits on the policy committee. That means that by early 2025 he’ll have appointed four of the seven-member board.
Colombia’s annual inflation rate slowed more than expected by all analysts, to a three-year low of 5.41% in October. However, some components related to service prices are still a source of concern, Taboada said.
Analysts are gloomier than the central bank is about the inflation outlook, because they anticipate a more dovish board.
Economists surveyed by the bank forecast inflation still close to 4% by the end of 2025. However, the bank’s own forecasters see it at 3%, as they expect the monetary policy committee to keep a more restrictive policy stance to guarantee inflation doesn’t overshoot its target for another year, she said.
Peso Drop
In recent meetings the board has split 4-3, with the majority in favor of cutting in half-percentage point increments, while the minority argued for bigger reductions. The bank has cut borrowing costs by 3.5 percentage points since December to 9.75%.
On Nov. 13, the peso weakened to 4,500 per dollar for the first time in 18 months. Taboada said that global conditions contributed to the drop, but that worries over the nation’s fiscal deficit are also making local assets more volatile.
“Unfortunately, due to external and local uncertainty, financial conditions for the country have deteriorated this year,” Taboada said. “This uncertainty requires a lot of caution on our part.”
Weaker-than-expected fiscal revenue and uncertainty over the costs of bills currently being discussed in congress have investors unsure whether Colombia will be able to rein in the deficit.
Finance Minister Ricardo Bonilla forecasts a fiscal gap of 5.6% of gross domestic product this year, from 4.3% in 2023.
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