BOGOTA, April 12 (Reuters) – Colombia has space to further lower its benchmark interest rate if truly necessary, the head of the central bank board said on Monday, though room for a more expansive monetary policy is limited amid international financial conditions and less investor risk appetite on emerging markets.
Colombia’s bank board has held the rate at a historic low of 1.75% since cutting 250 basis points from borrowing costs last year as it sought to help economic growth during the coronavirus pandemic.
“I can’t affirm we’ve reached a lower limit where it would be impossible to cut rates more,” board chief Leonardo Villar said during a virtual panel discussion with other Ibero-American central bankers. “That space effectively exists but it’s a space we could only use if we were sure it was indispensable and that its use would not be a detriment to credibility.”
Monetary policy depends a great deal on inflation, Villar said, and Colombia’s rate is already strongly expansive.
Colombia’s consumer prices grew 1.5% in the 12 months to March, reaching half of the bank’s long-term target rate of 3%.
The low borrowing costs are meant to help Latin America’s fourth-largest economy recover from the coronavirus, returning to pre-pandemic growth levels by the middle or end of 2022. The bank expects 5.2% growth this year, after an economic contraction of 6.8% in 2020.
“Our economies are still more vulnerable to external shocks and, in particular, abrupt changes in exchange terms and international financial conditions,” Villar said.
“In current conditions where international medium and long-term interest rates have shown an important upward adjustment, the risk that portfolio investors have a reduced risk appetite for emerging markets is not insignificant, which obviously reduces the available space for more expansive monetary policies on the part of our central banks,” Villar added.
Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb; Editing by Will Dunham
