South American countries are reducing interest rates to better control inflation and stimulate economic growth.
In Colombia, a clash has emerged between the government and the central bank, notes economist Christian Méndez to Sputnik.
In 2023, the debate about cutting rates gained traction across Latin America. This happened as global fears of inflation started to ease.
In Brazil, President Lula publicly disagreed with the central bank. The issue was the high rate of 13.75%. Eventually, the bank dropped it to 12.75% in two moves.
Chile and Uruguay also made cuts. Chile’s rate went from 11.25% to 9.5%. Uruguay’s dropped to 10%. In Peru, the central bank reduced the rate to 7.5%.
Now, the discussion is hot in Colombia. The government wants a lower rate from the current 13.25%. President Petro even took to social media, urging for a cut.
Méndez pointed out that high rates initially aimed to control inflation after the pandemic. But he questions if this approach works without harming economic growth.
Economist Isabella Weber suggests focusing on price controls instead.
Méndez backs Petro and former Finance Minister Ocampo’s view. They want Colombia’s rate down by 50 points.
Many nations are seeing moderated inflation. Therefore, Colombia faces a pivotal moment. It needs to balance economic stimulation with keeping inflation in check.
Background Economic Growth vs Inflation Control
The focus on interest rates is not just a monetary policy issue; it’s deeply political. Political leaders face pressure to grow the economy, often favoring lower rates.
Conversely, central banks aim to maintain economic stability, sometimes advocating for higher rates. This push and pull create a dynamic tension that is hard to resolve.
For instance, lowering rates might make a government popular in the short term by boosting spending.
But if this move triggers inflation, the political gain may be short-lived.
Moreover, high inflation often leads to economic inequality, severely affecting the less privileged.
However, the insistence on high rates to combat inflation can be equally problematic. Small businesses may find it difficult to borrow, slowing down economic growth.
This impacts employment rates and can lead to social unrest.
Thus, the decision around interest rates becomes a balancing act of various economic and social factors.