MNI INTERVIEW: Limited Room For BanRep Cuts This Year-Steiner

The Central Bank of Colombia still has room to cut interest rates this year, but by no more than 50 or 75 basis points given inflation concerns, former BanRep director and board member Roberto Steiner told MNI.

"I believe there is some room to lower interest rates, but not much. Market expectations suggest that the policy rate will decline slightly this year, but it is unlikely to fall more than 50 or 75 basis points," he said in an interview, adding that there could be a small 25-basis-point cut at the next meeting.

Steiner, who served as a board member until February of this year, said rates might end this year at around 8.5%, emphasizing that monetary policy needs to remain restrictive.

"According to the Taylor rule, the interest rate should be set above neutral when inflation expectations are not well anchored, the output gap is not clearly negative, and there are exchange rate or fiscal risks," he said.

BanRep kept interest rates unchanged at 9.25% at the end of July in a split four-three decision, with two members voting for a 50-basis-point cut and one for 25 basis points. (See MNI EM INTERVIEW: Pause Doesn’t End Easing Cycle -BanRep Director)

SPLIT BOARD

Steiner said that while the latest rates decision was the right one, the board may remain split in upcoming decisions. He was one of two board members removed by President Gustavo Petro, acting in line with Colombian law, and replaced by others who are closer to the thinking of the left-wing government, which has publicly called for lower rates. 

"But I don’t believe there is pressure on those people. I am sure they are independent and acting according to their conscience. Fortunately, they are a minority in the board,” he said. “There was no such pressure when I was on the board, nor do I think there is now. What happens is that people simply think differently.”

The board has not shied away from expressing its concerns over the government’s fiscal management, particularly at a time when Petro wants to raise the minimum wage by significantly more than inflation, he noted.

INVESTMENT CONTRACTION

According to BanRep’s minutes, inflation expectations remained above the 3% target even as annual inflation fell from 5.1% in May to 4.8% in June.

While investment has contracted, consumption remains strong, Steiner noted.

“The contraction in investment has very little to do with monetary policy. Therefore, the central bank must maintain a very restrictive monetary policy because the source of aggregate demand that most affects inflation — private consumption — is growing strongly,” he said.

Fiscal factors appear to have pushed up the real neutral rate, from around 1.75% to something closer to 3%, according to Steinger. 

"It would not surprise me if, when inflation reaches 3%, the terminal rate is around 6%. That would mean a real rate of 300 basis points, which is much higher than the terminal real rate we had, for example, before the pandemic, when the economy was more or less in balance."