Uribe Could Use Interest Rates to Curb Colombian Financial Risk
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
Central bank board member Ana Fernanda Maiguashca, who took office last month, has argued that the central bank can pursue a range of goals, including financial stability, alongside its inflation target.
“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 1,828.72 per U.S. dollar at 10:54 a.m. in Bogota. The currency has appreciated 23 percent since the beginning of 2009.
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