By Nelson Bocanegra and Carlos Vargas
BOGOTA, March 31 (Reuters) – Colombia’s central bank raised the benchmark interest rate on Tuesday for a second consecutive policy meeting, to 11.25%, while the government withdrew from the bank’s board amid a spat among 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, the board’s chief, Leonardo Villar, said. Two policymakers voted for a cut of 50 basis points and one voted for a hold.
Avila, who represents the government on the board, said the government would withdraw from the board until policymakers address what he called a need for coherence between their decisions and the economic reality of Colombia.
He said that a rise in rates would lead to an uptick in inflation and that the board was 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,” Avila said in a press conference at his ministry’s headquarters.
He did not attend a scheduled press conference with Villar that followed the decision.
Villar told the press conference that board members were doing their best to return inflation to its long-term 3% target next year, while rejecting Avila’s accusations that they were acting in their own interests.
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 or raise interest rates, arguing that rate cuts would better serve the economy. Policymakers including Villar have rejected such pressure, saying the board must be allowed to act independently.
“As I warned, the board of the Central Bank continues to pursue a policy that is killing the Colombian economy. The government is withdrawing from the board. We are not part of a suicidal opposition stance,” Petro wrote on social media after the bank’s decision.
Colombia’s consumer prices have risen in line with a 23% increase in the minimum wage and 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 said. A majority of analysts predicted the 100-point jump in a recent Reuters poll.
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, Nick Zieminski and Edmund Klamann)
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