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Uribe Could Use Policy Rate to Curb Colombian Financial Risk

Colombia’s central bank could set its policy rate higher than needed to control inflation if it sees a risk of excessive financial risk-taking, central bank Governor Jose Dario Uribe said.

Keeping interest rates low for “a long period” could risk creating imbalances in the financial sector, Uribe said in a speech to bankers in Medellin today. This would create a conflict between the bank’s objective of keeping annual inflation at 3 percent and its goal of preventing financial instability, Uribe said.

“Based on the risk of financial imbalances, the board could decide on an interest rate at a level that could be somewhat higher than is consistent with inflation converging to its target over the typical horizon of four quarters,” Uribe said. “I’m not saying that’s what will happen, but it’s a possibility. It could happen if inflation remains distant, as it is at the moment, from its target of 3 percent.”

The central bank has cut its policy rate two percentage points to 3.25 percent since June, the lowest among major Latin American economies, as growth cooled and the inflation rate fell to a six-decade low. Inflation accelerated to 1.99 percent last month, according to the median forecast in a Bloomberg survey of 19 analysts, from a six decade-low of 1.83 percent in February. The statistics agency is scheduled to report March inflation on April 5.

Range of Goals

Speaking to reporters after his presentation, Uribe said Colombia can use regulatory tools such as higher capital requirements for banks, to curb excessive risk-taking.

“If credit is expanding very fast, or people are taking on a lot of risk, one could increase capital requirements,” Uribe said. “For financial risk, the central element, the first tool to hand, is regulation and financial supervision.”

Central bank board member Ana Fernanda Maiguashca, who took office last month, has argued that the central bank financial stability should be one of the central bank’s main concerns, as it pursues sustainable long-term growth.

“You don’t need to put anything above inflation to worry about other things,” Maiguashca said in a Feb. 12 interview in her office at the Finance Ministry. “You can walk and chew gum at the same time.”

The central bank expressed concern with the pace of credit growth when it raised interest rates nine times between February 2011 and February 2012. Credit expanded 15 percent last year, from 22 percent growth in 2011.

Home prices rose 71 percent in the third quarter from a decade earlier, according to the bank’s inflation-adjusted used housing price index. Home prices are rising faster than nominal gross domestic product, Uribe said.

The peso dropped 0.5 percent to 1,830.22 per U.S. dollar at 12:28 p.m. in Bogota. Finance Minister Mauricio Cardenas said today that the currency is about 10 percent overvalued. The currency has appreciated 23 percent since the beginning of 2009.

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