Emerging questions over central bank independence

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Some people believe Colombia’s central bank has done everything right in recent years. 

During the worst times of the global economic crisis, it was gaining credibility by the hour. 

Its governor, José Darío Uribe (pictured), was labelled “practically a national hero” by Charles Calomiris of Columbia Business School in an article published by the Bank of England last year.

So how come Colombia’s president, Juan Manuel Santos, has been putting pressure on the bank to build its reserves to rein in the appreciation of the peso? 

Many people are beginning to wonder just how independent the Banco de la República really is.

Santos told the central bank should step up dollar purchases to curb the appreciation of the currency and to create “a much higher level of reserves, about $13bn higher.” 

Santos said he “would recommend to the central bank that they increase the amount they purchase on a daily basis, and I imagine they are studying that.”

Santos was kind enough to stress that such decisions have to be taken by the bank which manages the country’s $34bn in international reserves and currently buys $20m a day and that he “respects very much” the institution’s independence.

But some might question the value of those words. Leaving governor Uribe aside, out of the bank’s seven board members, the current government has four out of five directors on its side, all inherited from the previous government. 

Juan Carlos Echeverry, finance minister, also sits on the board. 

Last month he underlined the success that Peru, Colombia’s Andean neighbour, has enjoyed with greater central bank intervention in currency markets.

Since its creation in the early 1.920s the Banco de la República has undergone several reforms that have changed its objectives and degree of independence. 

Recently, the bank’s ability to run counter-cyclical monetary policy helped Colombia insulate itself from some of the worst effects of the global recession a big advance over the policies adopted in previous crises.

Governor Uribe may, indeed, decide to shrug off Santos’s suggestion after all, he has done so before. 

If, as expected, the bank cuts interest rates at its next monetary policy meeting on July 27, it will do so for technocratic reasons rather than as a result of pressure. 

Two members of its board voted that way at the last meeting in late June, since when the economy has showed further signs of slowing.

“Because of its composition, in theory, the central bank might not look very independent. 

The truth is that, in practice, it has been so,” says Alejandro Reyes, an analyst with Interbolsa in Bogotá.

Since 2.010 the government has been coming under increasing pressure to take action on the currency. 

Colombia has been on the receiving end of a wave of money unleashed by aggressive monetary policy in the crisis-stricken northern hemisphere. 

Colombia’s peso has gained more than 9 per cent since the start of this year alone, threatening exports and jobs.

Aware that the central bank might ignore pleas to intervene, the government has already been stepping in to curb inflows, hoarding abroad dividends from the nation’s jewel, the state-run oil company Ecopetrol.

Uribe has hinted he is open to bigger dollar interventions but, some believe, not as abrupt as the ones suggested by the president. “

There is not enough monetary room here now and the central bank knows sterilisation is really costly,” says Reyes.

The bank’s dollar-buying programme started in February and is set to end in November. 

Many like Reyes believe the bank will extend it, or maybe raise it to buy $30m or $40m a day. 

“The bank also knows things should be gradual,” he says.