Colombian policy makers are constrained in their ability to offset weak global demand with monetary stimulus due to the risks excess borrowing might pose to the country’s financial system, Finance Minister Mauricio Cardenas said.
At the same time, the Andean nation’s laws limiting the size of budget deficits reduce the scope for fiscal policy, Cardenas told a meeting of National Association of Financial Institutions in Bogota. The government is instead betting that private investment in transport and communications will take up the slack over the next few years, Cardenas said.
“There isn’t much room for counter-cyclical fiscal policy, nor is there much room for counter-cyclical monetary policy,” Cardenas said. “From the inflation point of view, you could do it, but you also have to take care that there aren’t excessive levels of debt, and that you don’t generate a lot of risk.”
Colombia cut its policy rate by 2 percentage points between July 2012 and March, the most in Latin America. Cardenas said recent data show the economy gaining speed in the second half of the year, supporting his forecast that the economy will grow 4.5 percent this year, its fastest pace since 2011.
The favorable “tail winds” from the world economy that have supported Colombian growth in recent years will probably slow, Cardenas said. In an earlier speech at the same event, central bank Governor Jose Dario Uribe said that weaker growth in China could mean lower prices for oil, the Colombia’s biggest export.
Outstanding loans rose 15.9 percent in August from a year earlier, the fastest pace in 12 months, while home prices rose 12 percent in the second quarter from a year earlier, to a record high, according to the central bank. Adjusted for inflation, homes are now 14 percent more expensive than they were at their previous record in 1989.
The annual inflation rate last month unexpectedly fell below the lower bound of its target range for the first time in 7 months. Consumer prices rose 1.84 percent in October, slower than predicted by all 24 analysts surveyed by Bloomberg, and the second-lowest rate since the government of dictator General Gustavo Rojas Pinilla in 1955.
Cardenas, who chairs the central bank’s seven-member policy committee, has often found himself in a minority in arguing for more interest rate cuts. In an e-mailed reply to questions yesterday, he said the economy may not need any more stimulus.
The recent fall in the peso, even after the central bank scaled back its dollar purchase program at its September policy meeting, has more benefits than costs for the economy, and is helping him to sleep at nights, Cardenas said. The currency has fallen 8.4 percent this year to 1,928.53 per U.S. dollar.
“I feel very satisfied that the exchange rate is remaining weaker than 1,900 without so much intervention,” he said. “Looking at a long-term cycle, these are the last opportunities to buy a cheap dollar.”
The central bank bought an average of $10.4 million per day this month, down from $35.7 million in September. The peso probably won’t revalue, Cardenas said.
To contact the reporter on this story: Oscar Medina in Bogota at email@example.com