(Bloomberg) — Colombia’s economy is in a weak condition, but there are risks in providing extra stimulus, according to one of the central bank’s new board members.
These include the possibility of deterring foreign investment flows and of encouraging people to take on risky debt, said Mauricio Villamizar, who was named a bank co-director last month.
“I agree that we are in a particularly vulnerable state, and I believe that there is a general consensus about taking an expansionary stance,” Villamizar said, in reply to written questions. “In terms of threats to providing extra stimulus, the usual suspects are loan quality, other credit risks, affecting long-term inflation expectations, and deterring portfolio flows.”
The economy suffered its deepest slump on record last year, destroying millions of jobs and leaving widespread bankruptcies. The central bank’s seven-member policy committee split at its last two meetings, with two board members saying that the lowest inflation rate since the 1950s creates space to cut interest rates, while the majority voted to leave them unchanged.
After the pandemic hit Colombia last year, the bank slashed its key rate seven times, to a record low of 1.75%. Villamizar says it’s providing stimulus at its current level.
The priorities for monetary policy are “providing enough liquidity, calming disorderly markets, and sustaining aggregate demand,” he said.
The new co-director said that he expects inflation to remain below its 3% target this year and in 2022, due to weak demand and to the widespread indexing of prices such as rent and school fees, which will rise in line with last year’s low price increases. Annual inflation was 1.6% in January, up slightly after touching a 65-year-low in October.
Villamizar will vote in his first policy meeting later this month.
The economy won’t recover to its pre-pandemic level until near the end of 2022, according to the bank’s forecasts. Villamizar said he’s “cautiously optimistic” on the recovery, though doesn’t expect to see much of a boost from the recent rally in oil prices, which may turn out to be temporary.
Read More: Colombia Recovers Faster-Than-Expected From Worst-Ever Slump
Villamizar got a doctorate from Georgetown University in Washington D.C. and first joined the bank as an intern two decades ago. At Georgetown, he studied the problems that central banks face when the they have “a large number of objectives and not enough tools.”
On the bank’s economics team, where he worked until last month, he studied the impact of central bank interventions in foreign currency markets, and concluded that these can be effective but tend to be short-lived, with the impact typically lasting about a month.
President Ivan Duque named Villamizar to the board last month, as well as Bibiana Taboada, a former economist at the World Bank, and former IMF official Jaime Jaramillo.
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