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Gustavo Petro Threatens to End Central Bank Independence in Colombia

Gustavo Petro

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Colombia’s president, Gustavo Petro, overstepping his legal authority, has questioned the policy of the Bank of the Republic of Colombia, in a thread on his Twitter account where he goes on a rampage against Colombia’s interest rate hikes.

In his first tweet, Petro argues that food prices continue to rise in Colombia despite a reduction in international inflation. Then, abusing his constitutional powers as president, he claims that the policy of raising interest rates does not work.

As a candidate, Petro questioned the independence of the Banco de la República on several occasions and accused the board of being co-opted by the government of Iván Duque. As president, although he has made fewer comments on the matter, he criticized the decision to raise interest rates during the month of September.  

In the following tweet, Petro accuses the board of Banco de la República of wanting to drive the Colombian economy into a recession, while claiming that the only reason they are raising interest rates is to prevent foreign investment from leaving the country, which is more attracted to U.S. markets.

Then, using confusing and misleading arguments, President Petro conflates issues and offers merely ideological solutions to solve a problem as complex as inflation or to achieve long-term growth in Colombia.

For starters, Petro is lying when he says that interest rates are not effective in controlling inflation. They are, however, it takes time for the economy to readjust to change, and the macroeconomic literature notes that the impact on consumption of a moderate rise in interest rates can take 6 to 12 months to be noticed.  

Even more troubling is the following tweet by President Petro where he suggests that the Banco de la República is failing to comply with its constitutional mandate, as a ruling by Colombia’s Constitutional Court obliges it to watch over the country’s growth and employment, ignoring its other mandate to contain inflation.

Petro’s tweet caught the attention of former Minister of Finance Mauricio Cárdenas, who refuted the president, clarifying that the setting of taxes on swallow capital is the Central Bank’s power, and Petro’s suggestion would cause a stampede of capital, generating with it more devaluation of the Colombian peso.

Cardenas also clarified that Banco de la Republica does not have the obligation to ensure the country’s growth and employment above inflation as Petro suggests.

The president also proposes an “anti-inflationary” policy where, like President Joe Biden, inflation will be magically controlled with a tax on Colombia’s big fortunes and with fertilizer subsidies and a future agrarian reform costing 60 billion pesos ($13 billion).

What really bothers Petro is that higher interest rates also make the government’s cost of borrowing more expensive, which prevents it from incurring higher public expenditures.

Although countries such as Argentina or Venezuela have already experienced firsthand the disastrous consequences of devaluing the currency to finance public spending, Petro’s government, faithful to its leftist stance, seems to ignore this fact and questions the decisions of a Central Bank that has been responsible and has managed to keep inflation under control for decades.

Petro’s complaint comes days after he questioned the fiscal rule, which controls the level of public indebtedness, stating that it needs to be reformed so that his government can incur more public debt.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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