MNI INTERVIEW: Pause Doesn’t End Easing Cycle -BanRep Director

The Central Bank of Colombia’s easing cycle will "eventually resume," though uncertainty remains about whether this will occur at the next meeting, BanRep director and board member Mauricio Villamizar told MNI.

“It’s important to remember that monetary policy affects prices with significant lags, typically between 12 and 18 months. Therefore, the decision we made recently will not affect April’s inflation, that figure reflects the impact of decisions made last year,” Villamizar said in an interview.

BanRep held its policy interest rate at 9.50% last month in a split four-three decision, with three members voting for a 50-basis-point cut.

“The pause helped mitigate credibility risk — that is lower today, though the possibility of having to raise rates again still lingers. Hopefully, we won’t reach that point,” he noted.

Asked about the next meeting, he said it is difficult to commit to a decision without all the information that will be available at the time. “We face high tariff uncertainty, a global environment of low growth — with recession risks in some countries — and high financial volatility,” he said.

PAUSE REFLECTS CAUTION

“In my view, the pause reflects the caution that generally defines us: preserving the credibility of the inflation target, ensuring sustainable convergence, and avoiding a de-anchoring of expectations.”

This "wait-and-see" stance also allows time to assess risks such as the impact of the increase in the minimum wage, exchange rate developments, and the behavior of regulated prices, particularly natural gas.

Regarding the split decision, he said it was normal for board members to weigh the many risks facing the economy differently. “Differences can also arise in intertemporal preferences, those who prioritize the present over the future tend to favor a faster easing cycle,” he said.

While there’s broad consensus on the terminal rate, there’s less agreement on the path to reach it, he noted. (See MNI INTERVIEW:Gradual Cuts Allow Lower Rates-BanRep Villamizar)

“We agree on the goal of achieving the lowest policy rate possible without compromising convergence to the inflation target. We seek a terminal rate that supports the highest level of sustainable growth.”

The board aims to avoid potential capital outflows that could increase the cost of external and domestic debt, weaken the capital market, trigger an exchange rate spike, and raise country risk, among other effects, he said.

LAST MILE

While inflation continues to decline, this is at a slower pace.

“As has happened in several countries in the region, the last mile tends to be the hardest. In some cases, there have even been inflationary rebounds,” he said.

“In this context, a sensible criterion is to ask: what would be the cost of being wrong? And in this case, perhaps keeping the rate unchanged was the least costly potential mistake.”

Current U.S. policies on tariffs, migration, and fiscal matters are clearly inflationary, he noted.

“Last September, markets expected six rate cuts from the Fed this year, now expectations are down to just two or three. This shift already reflects a growing risk of recession, some analysts estimate a 60% probability the U.S. will enter a recession this year.”

The trade tariff war directly affects Colombia, he said, through higher prices for tradable goods, disruptions in global value chains, and its impact on the exchange rate.

“The exchange rate is under pressure from lower oil prices amid slower global growth, greater risk aversion among foreign investors, and higher country risk, considering that oil revenues account for 15% to 20% of fiscal income,” he said.

FISCAL CONCERNS

Domestic fiscal concerns also remain high.

“There are major challenges: a rigid spending structure, a high level of inherited debt, increasingly expensive debt servicing, and significant fiscal needs to implement reforms. Any clear sign of fiscal adjustment or postponement would be more than welcome, as it would help ease pressure on the risk premium, reflected in a higher cost of debt issuance and a higher neutral policy rate,” Villamizar said.