Fears Grow as Petro Closes In on Colombian Central Bank Majority
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Loading... - Vittoria Marino
- 15 Jul 2024
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As President Gustavo Petro of Colombia moves closer to naming a majority of the central bank's board, economists are growing increasingly concerned about the potential impact on the institution's independence and credibility. Petro, who has frequently criticized the central bank, will soon have appointed four of the seven board members responsible for setting interest rates and currency policy.
Concerns Over Central Bank Independence
Comparison with Brazil
Recent turmoil in Brazilian markets has heightened fears in Colombia. In Brazil, President Luiz Inacio Lula da Silva’s criticisms of central bank autonomy have triggered selloffs in bonds and currency. Brazil's split central bank decision to slow the pace of rate cuts in May highlighted these risks. All four policymakers appointed by Lula backed a larger reduction, unsettling investors. This year, Lula will appoint another two directors and the bank’s president.
“What happened in Brazil was that the noise generated pressure on the real, which led to a further deterioration in inflation expectations,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It’s certainly a lesson, and when we see a lot of pressure from governments over central banks, it’s very counterproductive.”
Petro’s Criticisms
On the campaign trail in 2022 and as president, Petro criticized the Colombian central bank’s tight monetary policy, claiming it dampened investment. He also caused a selloff in the peso by suggesting a tax on capital outflows. However, so far, he hasn’t taken steps to undermine the institution’s independence, a key strength of Colombia’s economy.
Upcoming Appointments
Petro must change two members of the bank’s policy committee by February. Including one co-director he already named, plus the Finance Minister, he will have appointed four of the seven board members. Economists fear these new appointments could steer the bank toward more government-aligned policies.
Potential Impact on Monetary Policy
Concerns from Economists
Camilo Perez, chief economist at Banco de Bogota, fears the Petro-majority board could slash borrowing costs by a full percentage point in their first meeting in March. “The risk is that they’ll name people who only do what the government wants them to,” Perez said. A big interest rate cut could weaken the peso and harm the bank’s credibility.
Petro aims to overhaul the nation’s economic model by taxing the rich more and phasing out fossil fuels. He argues that high interest rates aren’t the appropriate tool for dealing with supply-side inflation factors.
Current Central Bank Actions
Since December, the central bank has started to lower interest rates. Finance Minister Ricardo Bonilla and one other board member have consistently voted for faster cuts. In June, the bank lowered its key rate by half a percentage point to 11.25%, defying the government’s call for a larger reduction. Colombia currently has the highest benchmark rate among major inflation-targeting economies in the region.
Future Projections
Andres Pardo, head of Latin America macro strategy at XP Investments, expects the board to become more dovish next year, likely lowering interest rates faster than economic models suggest. However, market volatility could act as a brake on this. “I’m worried not only that Petro will appoint more dovish people, which in itself wouldn’t be so bad, provided they are qualified and suitable, but that these people are more aligned to his ideology and unprepared for the role,” Pardo said.
Confidence in Institutional Resilience
Historical Precedents
Some former policymakers believe the institution will withstand Petro's influence. Colombia’s previous three presidents, Alvaro Uribe, Juan Manuel Santos, and Ivan Duque, all named board majorities, yet the bank maintained its independence.
“People who are appointed tend to behave in a very responsible way,” said Mauricio Cardenas, a former Finance Minister. “Even if Petro were to name two very politicized individuals, he still wouldn’t get control of the board.”
Current Board Dynamics
Olga Lucia Acosta, the member Petro already named, has not shown overt alignment with his policies, according to Cardenas. A survey by Colombia’s National Association of Financial Institutions suggested most analysts believe Acosta is the policymaker who has voted alongside the finance minister for faster interest rate cuts. Unlike in Brazil, Colombian central bank votes are anonymous.
Leadership Stability
There is also confidence that the current board will re-elect Leonardo Villar for a second four-year term as Governor. Former central bank co-directors Juan Pablo Zarate and Carlos Gustavo Cano expressed no worries about a threat to the institution’s independence. “My experience has been that there’s no relation of dependence between a co-director and the president who named them,” Zarate said.
Conclusion
As President Gustavo Petro prepares to appoint a majority of the Colombian central bank’s board, concerns are mounting about the potential impact on the bank’s independence and credibility. The experiences in Brazil serve as a cautionary tale, but historical resilience and current dynamics provide some confidence in the institution's stability. The upcoming appointments and their implications will be closely watched by economists and investors alike.
