New Central Bank Chief Says Colombia Rate Cut Isn’t Inevitableby and
Echavarria reiterates goal of inflation below 4% by year end
One-time Yellen student cites split vote at last rate meeting
Colombia’s new central bank chief said it’s too soon for policy makers to declare victory over inflation and that policy makers won’t necessarily cut rates again this month if they’re unsure of hitting their target.
“The more uncertainty you get, the less you should reduce rates, because we have to get inflation in the range of 2 percent to 4 percent -- that’s very important,” Governor Juan Jose Echavarria said Sunday, in an interview in Basel. “We have to guarantee that we are in the inflation range at the end of the year.”
Echavarria, a one-time student of Federal Reserve Chair Janet Yellen when she taught at Harvard in the 1970s, takes over at Colombia’s central bank as it tries to balance the risks of inflation remaining above its target for an extended period against the threat of too steep a slowdown. The bank cut borrowing costs for the first time in almost four years last month, as the economy grows at its weakest pace since the global financial crisis, with a contracting mining and energy sector.
The split among board members over whether to hold or cut rates is likely to continue at the January policy meeting, Echavarria said. If the board sees inflation isn’t approaching the target, “we have to keep rates up,” he said.
“In the last meeting, the vote was four in favor of decreasing and three opposing it, and I think it will be very similar to that next discussion,” he said. “It’s not very clear what to do.”
Annual inflation slowed to 5.75 percent in December, exceeding the forecasts of all 22 analysts in a Bloomberg survey, whose median forecast was 5.61 percent. Echavarria said that food price inflation was not as favorable as expected, but that the overall result had been within the range of outcomes foreseen by the bank. Consumer price rises hit a 16-year high of 8.97 percent in July, as a drought hit food supplies and a weaker peso raised import prices.
Echavarria said the bank’s goal of getting inflation back within its target range “keeps me awake at nights, because inflation figures are high. Mexico, Peru and Chile have an inflation record that is much better than we have, these days.”
Echavarria, 65, is a close ally of President Juan Manuel Santos and was an adviser on economic affairs in Santos’s 2014 re-election campaign. Nomura Holdings Inc. said this could hurt perceptions of the bank’s independence, especially given that Santos recently called for interest rate cuts. Asked whether these fears were legitimate, Echavarria said he owed his position to the bank’s board, rather than to Santos.
Economists surveyed by Bloomberg estimate that the economy expanded 1.9 percent last year, which would be slowest pace since 2009. Echavarria said that the economy has tended to grow at about 4.5 percent over the last two decades and that the current growth rate is “unsatisfactory”, even if other countries in the region are doing worse.
Echavarria cited Nobel laureate Paul Krugman and former Federal Reserve Chair Ben Bernanke among the economists he admires.