Bank of the Republic Manager Leonardo Villar’s Insights on Inflation and Monetary Policy in Colombia

2024-02-22 21:07:00

Manager of the Bank of the Republic

Photo: El Espectador – José Vargas

The five-point drop in inflation in the last 10 months, leaving it at 8.35% in January 2024, has been a response to monetary policy. “It is not a minor reduction, it is an important reduction (and) it reflects the importance of a painful monetary policy, without a doubt, costly, which is not pleasant to execute, but which was essential to begin to see the current trend (of inflation,” said the manager of the Bank of the Republic, Leonardo Villar, in the Anif-Fedesarrollo seminar, “Economic Perspectives 2024.”

You may be interested in: How to finance infrastructure?: the visions of the Government and unions

The central bank manager explained why the issuer is so cautious when deciding on interest rate cuts. Villar mentioned three arguments in favor of this caution. “They are all designed with the information we had when we made the last decision in January,” he said.

The first argument has to do with the fact that, despite the decreasing trend in inflation, in Colombia it remains five points above the target, while other countries in the region maintain the price index below 5%.

Villar recalled that Colombia is currently the second OECD country with the highest inflation following Turkey and the third in Latin America, behind Argentina and Venezuela.

The second argument has to do with inflation expectations and credibility in the bank’s goal. Implicit inflation expectations in the public debt market have been adjusted downward in recent months, but are still above the established goal. All in all, 2024 will probably be the fourth year in which inflation will be above the central bank’s target range, this situation “for obvious reasons significantly reduces the credibility of that target on the part of the general public and different agents.” that set prices and wages in the Colombian economy,” he said, noting that “this makes it more difficult and more expensive to reduce inflation and has negative effects on the possibilities of sustained growth and job creation.”

It may also be of interest: Future validity, inflation and rates: the outlook of the economy according to Minhacienda

The central bank manager criticized the minimum wage increases of the last three years. The increases have been made based on inflation observed in the past and not on the expected downward target.

Real wage increases with falling inflation become upward pressure on inflation and a source of difficulties for the growth of formal employment. “The increase in real wages that this implies in a context of falling inflation (of the order of 6% annually in 2023 and probably of the same order of magnitude in 2024) is much higher than the increase in productivity and real income per capita of Colombians and for this reason it becomes an upward pressure on inflation and a source of difficulties for the growth of formal employment,” said Villar.

The third argument for caution is related to uncertainty, Villar explained. This aspect will be essential to avoid situations in which the probabilities of slowing down or reversing forward “the process of relaxing monetary policy” increase in the event of unexpected situations such as changes in financial situations or more drastic climate impacts.

According to the country’s top banker, the chances of the bank’s board initiating “bolder” cuts will depend on inflation continuing to fall on a path consistent with meeting the goal.

1708647195
#cautions #Bank #Republic #cut #interest #rates #faster