Colombia government rift with central bank clouds future rate decisions, analysts say

By Nelson Bocanegra

BOGOTA, April 1 (Reuters) - Colombia faces mounting uncertainty after the government's decision to withdraw from the central bank's board cast doubt on future decisions following a 100-basis-point interest rate hike, analysts warned on Wednesday.

Finance Minister German Avila, the government's representative on the central bank board, announced his withdrawal from the body on Tuesday with the support of President Gustavo Petro.

The move followed the board's decision to raise the benchmark interest rate to 11.25% in a split 4-2-1 vote. Avila slammed the increase as "disproportionate," while Petro accused the central bank of implementing "a policy that is killing the Colombian economy."

Experts warned that the government's refusal to attend board meetings risks eroding institutional credibility and aggravating a fragile macroeconomic environment just four months before Petro's four-year term ends.

"What the government is proposing with this decision is a kind of boycott of the board of directors of the Bank of the Republic, trying to prevent it from functioning," constitutional lawyer Juan Manuel Charry said, speaking to local radio station Javeriana Estereo.

Under Colombian law, the board requires at least five of its seven members to be present to make decisions, and one of those five must be the finance minister. The absence of the minister could effectively block the bank's ability to set monetary policy, even in emergencies.

"Overall, in practice, the minister's?absence could effectively block the central bank's ability to make monetary policy decisions... at a time of elevated external uncertainty and significant macroeconomic vulnerabilities," said Andres Pardo, head of LatAm macro strategy at XP Investments.

Pardo noted the country is already grappling with a large fiscal deficit, a widening current account deficit, and unanchored inflation expectations.

The central bank has raised rates by 200 basis points so far this year to curb inflation, with analysts projecting the rate could reach 12% by year-end.

Avila said in a press conference after walking out of Tuesday's meeting that the government would only reconsider its stance when the bank "understands that there must be consistency with the country's economic reality."

While the finance minister can resign his chairmanship, legal experts noted that Petro is obligated to appoint a replacement or face potential disciplinary investigations by Congress.

The standoff has already spooked markets.

"This event is momentous insofar as it generates high uncertainty about future monetary policy meetings," the Bank of Bogota said in a research note, adding that the impasse could hike the country's risk premiums.

(Reporting by Nelson Bocanegra, Writing by Natalia Siniawski, Editing by Nick Zieminski)