Fears Grow as Petro Closes In on Colombian Central Bank Majority

Un sello afuera del Banco de la República de Colombia en Bogotá. (Ivan Valencia/Fotógrafo: Iván Valencia/Bloom)

(Bloomberg) -- Colombian economists are growing nervous as the day approaches when President Gustavo Petro, who has repeatedly attacked the central bank, will have named a majority of its board.

Their fears have been heightened by recent turmoil in Brazilian markets, where President Luiz Inacio Lula da Silva’s attacks on central bank autonomy have triggered selloffs in his nation’s bonds and currency. 

Petro has to change two members of the bank’s policy committee by February at the latest. Including one co-director he already named, plus the Finance Minister, that means he’ll have appointed four of the seven people who set interest rates and currency policy. 

Brazil’s split central bank decision to slow the pace of rate cuts in May highlighted those risks. While the majority of the board voted for a quarter-point cut, what spooked investors was that all four of the policymakers appointed by Lula backed a bigger reduction. And, this year, Lula will get to name another two directors, as well as the bank’s president.   

“It’s certainly a lesson and when we see a lot of pressure from governments over central banks, it’s very counterproductive,” said Alberto Ramos, chief Latin America economist at Goldman Sachs, speaking by phone. “What happened in Brazil was that the noise generated pressure on the real, which led to a further deterioration in inflation expectations,” making it harder for the central bank to do what Lula wants and lower rates.  

On the campaign trail in 2022, and then as president, Petro criticized the Colombian central bank’s tight monetary policy, which he says is damping investment. He also triggered a selloff in the peso when he suggested a tax on capital outflows. 

So far, however, he hasn’t taken any steps to undermine the institution’s independence, which investors prize as one of the Andean economy’s principal strengths. 

Boosting Output

In a 2022 interview, he said he would appoint economists with a “background in production,” who could move monetary policy toward boosting output and employment, as well as protecting macroeconomic stability and price stability. 

Camilo Perez, chief economist at Banco de Bogota, is among those who are worried. His base scenario is that when the Petro-majority board sets interest rates for the first time in March, it could immediately slash borrowing costs by a full percentage point. 

“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 negatively affect the bank’s credibility, leading to a weaker peso and institutional uncertainty, he said. 

Petro wants to overhaul the nation’s economic model by taxing the rich more and phasing out fossil fuels. He’s argued that high interest rates aren’t the appropriate tool to deal with inflation caused by supply-side factors.  

Since the bank began to lower interest rates in December, Finance Minister Ricardo Bonilla and one other board member have repeatedly voted for faster cuts. At its June meeting, the bank lowered its key rate by half a percentage point to 11.25%, defying the government, which wanted a bigger reduction. 

Colombia currently has the highest benchmark rate among major inflation-targeting economies in the region. Andres Pardo, head of Latin America macro strategy at XP Investments, agrees that the board is likely to become more dovish next year. 

In the first half of 2025, the bank is therefore likely to lower interest rates faster than economic models suggest it should, he said. However, market volatility could potentially act as a brake on this, he added.  

“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. 

Juan David Ballen, an economist at brokerage Casa de Bolsa in Bogota, said he too fears that board more aligned with the government politically could ease monetary policy too fast, harming the bank’s credibility. 

No Control

Some former policymakers are confident that the institution will come through the 2022-2026 Petro government unscathed. Colombia’s previous three presidents — Alvaro Uribe, Juan Manuel Santos and Ivan Duque — got to name board majorities, yet the bank would disregard their unsolicited advice on interest rates and the currency.   

“People who are appointed tend to behave in a very responsible way,” said Mauricio Cardenas, who served as Finance Minister from 2012 to 2018. “That’s been the tradition.” 

Even if Petro were to name two “very politicized” individuals, he still wouldn’t get control of the board, Cardenas said. That’s because the member he already named, Olga Lucia Acosta, doesn’t fit that description, he said. 

Even so, a survey by Colombia’s National Association of Financial Institutions, found that most analysts believe that Acosta is probably the policymaker who has voted alongside the finance minister for faster interest rate cuts.

Unlike in Brazil, Colombian central bank votes are anonymous. Acosta declined to comment. 

Another reason to bet on stability is that the current board is very likely to re-elect Leonardo Villar for a second four-year term as Governor, Cardenas said.   

Two former central bank co-directors, Juan Pablo Zarate and Carlos Gustavo Cano, also told Bloomberg that they aren’t worried about a threat to the institution’s independence. 

“My experience has been that there’s no relation of dependence between a codirector and the president who named them,” Zarate said. 

--With assistance from Nicolle Yapur.

©2024 Bloomberg L.P.

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