Colombia has an inflation record to be envied. since june 2009 the CPI (consumer price index) has only exceeded the 4% maximum set by the Banco de la República (BanRep) on one occasion, reaching 4.02% in October 2011.
“Most central banks in Latin America have an inflation targeting mandate,” says Ram Bala Chandran, senior portfolio manager for Neuberger Berman’s local currency emerging markets debt fund in the Hague. “If you judge them on that basis Colombia stands out, having kept inflation close to the mid-point of target.”
By the end of 2013, however, inflation had been erring just below the 2% minimum — despite the base rate remaining historically low at 3.25%.
Though inflation rose slightly in the first few months of 2014, it remained well below the mid-point of the target and the market expected a hold when the central bank met in April.
BanRep’s board of directors, however, decided to raise the benchmark interest rate by 25bp.
“It was somewhat unusual to hike rates with inflation still low,” says one New York-based LatAm rates strategist at a European bank. “Few central banks anywhere were hiking and Colombia could have got away without doing so.”
Yet the bank’s outlook on domestic demand and an economy nearing potential was spot on, and while they watched inflation and growth rise they made the same 25bp move upwards each month until at least September.
“It is very positive that while other countries have been cutting rates, Colombia has continued to raise rates, even though several observers have not been in agreement with this policy,” says Daniel Velandia, chief economist at Andean investment bank Credicorp Capital’s Bogotá offices. He sees Uribe’s management as “extremely” positive.
“Yet as inflation has risen, the BanRep has been proven right,” says Velandia, “and the fact that the central bank has continued to hike is undoubtedly a consequence of Uribe’s strong leadership.”
Other observers point out that BanRep under Uribe manages to rank as one of the most orthodox and clear central banks despite having the finance minister on the board — an unpopular set-up among most analysts.
“From my point of view, I’d like to see a fully independent central bank,” says the New York-based strategist. “But what this really means is that Uribe deserves more praise: credit to him for having hiked even working alongside the ministry of finance, who will naturally be dovish.”
The praise Uribe receives for his communication to the market also refers to BanRep’s FX intervention. Again, Colombia can say it has been an exception in the region, continuing to buy dollars even through a sharp depreciation of the peso in summer 2013 and January 2014 and with other LatAm central banks propping up their currencies. One economist says it is a sure sign of the confidence BanRep has in its own work.
“They have been consistent in saying they want to accumulate reserves and this makes perfect sense,” says the strategist.
“BanRep was the exception in continuing to buy dollars,” says Velandia. “This was necessary to build Colombia’s reserves and was proven to be the right decision as the peso rallied again this year.”
EM INTERVIEW The softly spoken José Darío Uribe, who has led BanRep since 2005, does not claim to have any new-fangled tricks of the trade up his sleeve.
Rather, he says the keys to the success of Colombia’s monetary policy reside in a clear and well defined monetary policy framework, a continuous study of the behaviour of the economy and risk analysis with a permanently forward looking focus.
Perched next to Bogotá’s world famous Gold Museum, BanRep would appear to have an unrivalled viewpoint on the riches of Colombia’s economy at any given time.
If the central bank is ahead of the curve it’s thanks to “the meticulous work carried out by the bank’s technical team and board members in understanding where the Colombian economy is heading,” says Uribe.
“We have our own mechanisms to measure sentiment in the economy, allowing us this insight. For example, we regularly meet private sector representatives across the country and carry out our own surveys each month.”
This foresight drove the surprise interest rate rise in April.
“Although inflation ended 2013 below the target range, we thought this was down to temporary factors and was also affected by the tax reform of 2012,” says Uribe. “We also foresaw an improvement in domestic demand and credit.” Beginning the hiking cycle in April ensured BanRep would allow raising rates in a “gradual” fashion, he points out.
“We did not want to run the risk of starting at a time when there was already excessive growth in demand, credit and inflation expectations.”
The same assuredness applies to FX intervention: a tried and tested criteria determined firstly by a moving target of international reserves and timing dollar purchases to help the peso when it strengthens too much.
This groundwork means Colombia is “very well positioned to tackle interest rate hikes in the US thanks to well anchored inflation expectations, a robust financial system and an adequate level of international reserves”, concludes Uribe.