Oct 28, 2022
Colombia Lifts Key Rate to 21-Year High Against Petro’s Wishes
Bloomberg News
,![Gustavo Petro, Colombia's president, speaks during the commercial border reopening between Venezuela and Colombia in Cucuta, Norte de Santander department, Colombia, on Monday, Sept. 26, 2022. Colombia and Venezuela fully re-opened their border on Monday, potentially reactivating billions of dollars in trade that dried up during years of diplomatic tension., Bloomberg Gustavo Petro, Colombia's president, speaks during the commercial border reopening between Venezuela and Colombia in Cucuta, Norte de Santander department, Colombia, on Monday, Sept. 26, 2022. Colombia and Venezuela fully re-opened their border on Monday, potentially reactivating billions of dollars in trade that dried up during years of diplomatic tension.](/polopoly_fs/1.1838908.1666982544!/fileimage/httpImage/image.jpg_gen/derivatives/landscape_620/gustavo-petro-colombia-s-president-speaks-during-the-commercial-border-reopening-between-venezuela-and-colombia-in-cucuta-norte-de-santander-department-colombia-on-monday-sept-26-2022-colombia-and-venezuela-fully-re-opened-their-border-on-monday-potentially-reactivating-billions-of-dollars-in-trade-that-dried-up-during-years-of-diplomatic-tension.jpg)
(Bloomberg) -- Colombia’s central bank ignored complaints from President Gustavo Petro and raised interest rates to the highest level in more than two decades, while also deciding against intervention in the currency market.
The bank lifted its benchmark rate by one percentage point to 11%, after the peso plunged and foreign investors dumped the nation’s bonds.
The unanimous decision, which was in line with expectations, extends the steepest series of interest rate increases since the bank started inflation targeting at the end of the 1990s.
Policymakers struggling to contain the fastest consumer price rises in nearly a quarter of a century are having their task complicated by a drop in the peso amid uncertainty over the policies of the Petro government. The president criticized the central bank this month in a series of tweets, contributing to a sell-off in Colombian assets.
Finance Minister Jose Antonio Ocampo told reporters after the meeting that the latest rate increase should help to calm the market. The bank decided against currency intervention after studying liquidity in the futures market and finding it to be normal, he said.
When the bank intervened in the market at the start of the Covid-19 pandemic, it cited a lack of liquidity as its reason.
The currency weakened to a record low of 4,990 per dollar Monday, while investors regard the nation’s debt as the riskiest it’s been since the 2008-2009 global financial crisis, according to trading in credit default swaps.
“During the last month, the adverse financial conditions facing the economy got more acute, caused by global factors and idiosyncratic factors,” bank Governor Leonardo Villar said, reading the bank’s statement after the decision. “Inflation expectations continued to rise over the last month, getting further away from the target.”
Read more: Bond Traders Strike Again as Colombia Walks Back Plans
Even after paring losses later in the week, the peso is still the worst performer among major emerging markets this month, after the Argentine peso.
Petro Tweets
Annual inflation accelerated to 11.4% last month, its fastest pace since 1999, and is forecast to have accelerated further this month.
A series of tweets by Petro earlier this month criticizing the bank’s interest rate rises alarmed some investors. The president also suggested that a tax on capital outflows might be a good alternative to interest rate rises, though Ocampo later said this isn’t being considered.
The foreign funds which have poured money into Colombia’s local peso bond market over the last decade have been net sellers in October, according to Ocampo.
Read more: Foreign Funds Ditched Colombian Government Peso Bonds in October
The bank also adjusted its growth outlook. The economy will expand 7.9% this year, from a previous forecast of 7.8%, Villar said. That will slow to 0.5% in 2023, from a previous forecast of 0.7%.
(Adds Ocampo’s comments on currency intervention from first paragraph.)
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