Colombia’s Finance Minister Germán Ávila abandoned a meeting of the board of the central bank (Banco de la República), on April 1 in protest over two decisions by the institution: the release of an internal document without prior consultation, and a 100-basis-point increase in the benchmark interest rate, which was raised to 11.25%.

According to the finance minister, the disclosure of the document, which involved both institutions and was linked to a draft government decree, constituted an “abuse.”

He also described the rate hike, the second so far this year, as “irresponsible and inconvenient,” arguing that it contradicts the government’s economic growth strategy.

The central bank said the decision was approved by a majority of its board: “four members voted in favor of the increase, two supported a 50-basis-point cut, and one proposed keeping the rate unchanged.”

The bank justified the move by noting that inflation stood at 5.4% in January and 5.3% in February, above the 5.1% recorded at the end of 2025. It also warned of external risks, including the impact of the conflict in Iran on the global economy, which could increase the cost of key imports such as gas and fertilizers and add to inflationary pressures later this year.

It remains unclear whether Ávila’s withdrawal from the board will be temporary or permanent, but the episode marks a new point of institutional tension that could influence the direction of monetary policy in Colombia in the coming months.

Clash between monetary policy and government strategy

Ávila criticized the decision, saying the central bank is overlooking the country’s economic progress. “The decision taken by the central bank is repetitive and continues to ignore the national government’s efforts to ensure fiscal stability and sustained economic growth,” he said.

He also argued that the increase is disproportionate compared with global trends. “There is not a single economy in the world proposing a 200-basis-point increase in the benchmark rate in the current global context,” he said, referring to the fact that the bank had already raised rates by 100 basis points in February, meaning a total increase of 200 basis points in just four months.

The government maintains that macroeconomic conditions remain stable, pointing to controlled inflation, a relatively stable Colombian peso (COP) against the dollar, declining unemployment and solid productive growth, and argues that tighter monetary policy is unnecessary.

Debate over central bank independence

The Finance Ministry said the minister’s decision to leave the meeting does not seek to challenge the independence of the central bank, but rather to highlight the need for its decisions to align with the country’s economic and social reality.

However, the move has raised legal and institutional concerns. Central bank chairman of the board, Leonardo Villar noted that the finance minister has a constitutional obligation to attend board meetings, as he “not only represents the government but also lead the meetings” said in a public interview broadcasted by media outlet like La República.

He warned that an indefinite absence could amount to a breach of legal duties and urged President Gustavo Petro to appoint an “ad hoc” delegate if the minister decides not to attend future meetings.

Experts say the minister’s absence could affect the board’s ability to make decisions. According to Andrés Pardo, former deputy finance minister and head of Latin America macro strategy at XP Investments, in an interview with Valora Analitik, “current regulations require at least five members, including the finance minister or a delegate, for the board to deliberate and decide”.

This could mean that, without his presence, the central bank may be legally unable to adopt monetary policy decisions.

Economic impact

The rate increase could have significant effects on the real economy. According to the Finance Ministry, a move of this magnitude could slow economic recovery, increase borrowing costs for households and businesses, and raise debt servicing costs.

Small and medium-sized companies, construction, retail and tourism are expected to be among the most affected sectors, along with households holding variable-rate loans.

Lower-income groups could face the greatest impact, as reduced purchasing power and tighter access to credit may deepen economic inequality.

In a report issued yesterday, New York-based credit rating agency Fitch Ratings said that “Colombia’s creditworthiness could be pressured” if low growth remains the norm at the same time that high fiscal deficits undermine the government’s push to first stabilize, and eventually reduce, the nation’s debt burden.

Fitch Ratings, which improved its outlook for Colombia’s ratings from negative to stable in March, has dropped its full-year 2017 forecast for the Andean nation’s economy down from 2.3% GDP growth to just 2.0%.

Fitch points to both low oil revenue and the slow execution of Colombia’s enormous 4G highway overhaul program as reasons why economic growth is failing to hit projections. First quarter expansion came in at a disappointing 1.1%, and various analysts at the central bank, private financial institutions, and research firms alike have expressed pessimism about soon-to-be-released figures for the second quarter.

Fitch’s said that its projection of 3.2% GDP growth in 2018 remains unchanged, however, highlighting that the current hurdles are not cause for full-blown panic. “Monetary easing currently underway will likely boost domestic demand, infrastructure bottlenecks are likely to be resolved beginning in the second half of 2017, and oil production should stabilize,” said Fitch Ratings.

The administration of President Juan Manual Santos has placed a priority on retaining its rating. Last year, after both Fitch and Standard & Poor’s issued concerns about long-term fiscal concerns that could lead to a downgrade, the government worked to pass a tax reform that would help shore up a budget that has been been hammered by the loss of oil revenues since the price of crude began to plummet in late 2014.

In discussing the nation’s rating last year before the reform was finalized, Finance Minister Mauricio Cárdenas told Bloomberg that “this is something we’re going to preserve, and we’re going to introduce all the decisions that are necessary to keep our BBB rating.”

Since the reform, Fitch Ratings has improved Colombia’s ratings outlook from negative to stable. But Standard & Poor’s most recent assessment, issued in January, maintained a negative outlook despite the tax reform already having gone into effect.

In its assessment released yesterday, Fitch Ratings also raised its projection for Colombia’s fiscal deficit rate. The agency now expects the fiscal deficit to reach 3.1% of GDP next year, an increase from its earlier forecast of 2.7%. This strain will be compounded by the country’s debt-to-GDP ratio. The big three rating agency had expected that figure to start to fall in 2018, but its revised assessment now predicts the ratio to merely stabilize next year.

“The changed fiscal targets do not jeopardize the overall trend toward reducing the debt burden in the medium term, but they do highlight risks of fiscal slippage,” said Fitch while highlighting that Colombia’s gross debt burden of nearly 50% of GDP is “nearly 10 percentage points higher than the BBB median.”

Colombia’s main strategy to reel in its fiscal deficit has been cutting expenditures rather than planning for higher incoming revenue. But this could prove difficult given that any strategic financial plans could be disrupted within 12 months as the nation will hold both a presidential and congressional election in the first half of 2018.

The departure of President Santos, whose second and final term in office ends next year, also means that spending initiatives related to Colombia’s peace deal with FARC could be altered, especially if a conservative-leaning head of state hostile to the accord takes office.

Still, fiscal discipline will be required if the federal government wants to hit its target fiscal deficit of 2.2% of GDP by 2019, a figure that is almost a full percentage point below Fitch’s new projection for 2018. “The nearly 1% of GDP adjustment needed to reach the 2019 target is ambitious without additional tax revenue measures and relies on additional spending cuts and anti-tax evasion measures earned by beefing up the tax authority’s capacities,” stated Fitch. This same sentiment applies in relation to Colombia’s hope to get its fiscal deficit down to 1% of GPD by 2022.

Photo credit: Fitch Ratings