* The withdrawal of Finance Minister Avila could paralyze the central bank’s monetary policy decisions
* Analysts warn move undermines institutional credibility and worsens macroeconomic risks
* Bank of Bogota says impasse increases uncertainty and could push up Colombia’s risk premiums
* President Petro supports Mr Avila and criticizes the central bank’s rate hike, deemed detrimental to the economy
BOGOTA, April 1 (Reuters) – Colombia faces growing uncertainty after the government’s decision to withdraw from the central bank’s board, casting doubt on future decisions following a 100 basis point interest rate hike, analysts warned on Wednesday.
The Minister of Finance, German Avila, representative of the executive within the council of the central bank, announced Tuesday his withdrawal from the institution with the support of President Gustavo Petro. This decision follows the council’s resolution to raise the key rate to 11.25% in a split vote (4-2-1). Mr. Avila criticized a “disproportionate” increase, while Mr. Petro accused the central bank of implementing “a policy that is killing the Colombian economy.”
Experts have warned that the government’s refusal to sit in on council meetings risks eroding institutional credibility and worsening a fragile macroeconomic environment, just four months before the end of Mr Petro’s four-year term.
“What the government is proposing with this decision is a sort of boycott of the board of directors of the Bank of the Republic, trying to prevent its functioning,” constitutional lawyer Juan Manuel Charry told local radio station Javeriana Estereo.
According to Colombian law, the council requires the presence of at least five of its seven members to deliberate, and one of these five must be the finance minister. The minister’s absence could effectively block the bank’s ability to set monetary policy, even in an emergency. “Overall, in practice, the absence of the minister could hamper the central bank’s ability to make monetary policy decisions… at a time when external uncertainty is high and macroeconomic vulnerabilities are significant,” Andres stressed Pardo, head of LatAm macro strategy at XP Investments.
Pardo noted that the country is already struggling with a large budget deficit, a widening current account deficit and unanchored inflation expectations.
The central bank has raised rates by 200 basis points since the start of the year to curb inflation, with analysts forecasting the rate could reach 12% by the end of the year.
Avila told a news conference after leaving Tuesday’s meeting that the government would only reconsider its position when the bank “understands that there must be consistency with the economic reality of the country.”
Although the finance minister can relinquish his presidency, legal experts have stressed that Mr. Petro is required to appoint a replacement or face possible disciplinary investigations by Congress.
This standoff has already frightened the markets.
“This event is major in that it generates strong uncertainty regarding the upcoming monetary policy meetings,” the Bank of Bogota said in a research note, adding that the impasse could push up the country’s risk premia. (Reporting by Nelson Bocanegra, French version by Natalia Siniawski, editing by Nick Zieminski)
