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Evening Edition – Colombia’s Monetary Policy Meeting: No rate moves in sight

March 22, 2019

We only expect a rate hike by the end of the year

See our Week Ahead full note at the end of this report.

Talk of the Day


In its second monetary policy meeting of the year, the central bank of Colombia kept the reference rate at 4.25%. This was the seventh consecutive meeting the board has voted to leave the policy rate unchanged at 4.25%, once more with the support of all board members. The press release announcing the decision retained a neutral stance, hinting at stable rates for the time being. A gradual domestic activity recovery, well-behaved inflation, a weak global economy and a looser policy stance by the Fed make rate hikes in the near term unlikely. A modest monetary stimulus and limited concern over the current account deficit also support stable rates. Hence, we expect the central bank hike only by the end of the year. The next monetary policy decision will take place on April 26.
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The coincident activity indicator (ISE) in January came in well below expectations. The original series grew 2.2% yoy, an improvement from the 1.0% recorded in December, but below the 3.0% expected by us (also the market consensus). A higher reading was expected following the sector data for the month (retail sales: 3% yoy; manufacturing: 3% yoy). Growth in the quarter ending in January was 2.4% yoy, slowing from 2.8% in 4Q18 and 3.3% in 3Q18). At the margin, activity also moderated to 2.3% qoq/saar (2.9% in 4Q18 and in 2Q18). Even with the central bank noting that the short-term potential growth is lower than the 3.3%-3.5% medium-term potential, the coincident activity indicator suggests that narrowing of the output gap remains adrift. The output gap development alongside controlled inflation reaffirm our view that the central bank would be in no rush to start removing the mild monetary stimulus in place. Overall, we expect activity to improve this year with growth of 3.3% (2.7% last year) aided by the still-expansionary monetary policy, recovering private sentiment and growing signs of an investment improvement (as capital goods imports pick up). However, lower oil prices (relative to 2018) and a sluggish global economy are key downside risks to our forecast.


CPI was below market expectations, with core inflation slowing. Mexico’s CPI posted a bi-weekly rate of 0.26% in the first half of March (from 0.29% a year ago), below our forecast of 0.29% and median market expectations. Importantly, core CPI posted a bi-weekly rate of 0.18% (from 0.24% a year ago and below the 5 year median print of 0.24%). At the margin, headline and core inflation decelerated sharply. Assuming bi-weekly inflation in line with the 10-year median variation in the second half of March, we estimate that seasonally-adjusted three-month annualized inflation stood at 0.20% in March (from 0.38% in February) for the CPI and 2.56% (from 3.00% in February) for the core index. 

We expect inflation to end 2019 at 3.6%. Importantly, core inflation, which Banxico’s board is closely monitoring, is gradually falling, with core services inflation decelerating significantly. However, the uncertainties that Mexico’s economy still faces continue to constitute upside risks for inflation. In this context, the central bank is likely to remain on-hold next week. However, should these uncertainties dissipate, below-potential growth combined with falling inflation will likely allow for interest rate cuts before yearend (we expect two 25-bp rate cuts in 4Q19).
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The Week Ahead in LatAm


The trade balance for February will come out on Tuesday. A weak currency and contraction of internal demand are leading to trade surpluses. We forecast a surplus of USD 400 million in February (up from a deficit of USD 900 million deficit registered in the same month of 2018).

The INDEC will also release the current account balance for 4Q18 on Tuesday. The current account deficit fell to USD 7.6 billion in 3Q18 from USD 8.3 billion in 3Q17. We expect to see a new reduction in the current account deficit in 4Q18 as a consequence of a weaker peso and lower internal demand. Our forecast for 2018 is a deficit of 4.4% of GDP.  

The INDEC will publish the EMAE (official monthly GDP proxy) for the first month of the year on Thursday.According to leading and coincident indicators, the economic activity grew on a sequential basis in January. Official indicators for industrial output and construction activity showed month-over-month gains of 4.6% and 4.4%, respectively, adjusted by seasonality. The monthly GDP proxy published by OJF consulting firm (IGA index) rose 0.25% mom/sa in the same period. We forecast a 0.7% gain against December 2018, leading to a 6.9% year-over-year drop.


The Copom minutes will be released on Tuesday, at 8:00 AM. In the last meeting, the committee kept the base rate at 6.5% pa, as widely expected. Importantly, despite the lingering uncertainties regarding the continuity of reforms, it now sees the balance of risks to inflation as symmetric, conceding that recent indicators point to a slower-than-expected pace of economic recovery, but that an assessment of that behavior will require time.

Regarding inflation, March’s IPCA-15 biweekly inflation will be released on Tuesday. We expect a 0.58% increase in the period, which should accelerate the accumulated inflation in 12 months to 4.22% (from 3.73%). Food at home and vehicle fuels may pressure the monthly print. Also, ANEEL will announce April’s electricity bill tariff flag on Friday. We expect maintenance of the green flag.

On economic activity, the highlights will be February’s labor market data: CAGED’s formal job creation (without a specific date) and PNAD national unemployment rate on Friday. For CAGED, we forecast a net creation of 150k formal jobs, which implies a 42k formal jobs creation on seasonally adjusted terms, decreasing the 3-month s.a. moving average from 46k to 35k. For PNAD, we forecast a 0.4 p.p. increase on unemployment rate to 12.4% (down 0.1 p.p. to 12.2% adjusting for seasonality). Also, FGV’s business confidence surveys for March on industry (both the preview and the final reading), consumer, construction, commerce and services, as well as the economic uncertainty indicator, will be released throughout the week.

External accounts data will also be released. We expect the current account balance (Mon.) to post a $900 million deficit in February 2019, below the USD 2.0 billion deficit seen in the same month of 2018. This result is driven mostly by a stronger trade surplus. Over 12 months, we expect the current account deficit to slide to USD 13.6 bn (or 0.7% of the GDP) and the 3-month seasonally adjusted moving average to increase to a USD 12.4 bn deficit. Direct investment in the country will likely amount to USD 7.6 billion in February, leading the 12-month reading to USD 89 billion (4.7% of GDP).

Additionally, on fiscal accounts, relative to February, we expect the central government (Thu.) to post a BRL 17.8 bn primary deficit, and the consolidated public sector (Fri.) to post a BRL 15.5 bn primary deficit.

Finally, the market will remain focused on the news flow about the pension reform.


On Friday, the national institute of statistics (INE) releases industrial activity indicators for February. Industrial production (aggregating mining, manufacturing and utilities) in January decreased 0.8% yoy (+1.6% in December), dragged down by mining. Meanwhile, still dynamic manufacturing of machinery and equipment consolidated the expectation of robust investment. While mining will likely remain the primary drag to activity in February, we expect manufacturing to grow 2.2% yoy aided by a lower base of comparison.

On the same day, INE releases the national unemployment rate for the quarter ending in February. The labor market continued to show a mixed performance at the beginning of 2019. The unemployment rate for the quarter ending in January came in at 6.8%, 0.3pp higher than one year earlier. Meanwhile, job creation moderated to 0.6% year-over-year, from 0.7% in 4Q18, the lowest since the quarter ended in November. We expect the unemployment rate to come in at 7.0%, above the 6.7% recorded one year before.

On Friday, the central bank will announce its monetary policy rate decision. Following the first rate hike in October, the board unanimously decided to implement a second hike to 3.0% in January. Nevertheless, the minutes of that meeting showed a board growing more cautious. We believe that on the wake of the publication of the inflation report (April 1), in which the central bank will likely address uncertainty over inflation dynamics and assess the impact of a risky external scenario on domestic activity, the board will act with caution leaving rates unchanged for now.


On Thursday, think-tank Fedesarrollo will publish industrial and retail confidence for February. At the start of this year, industrial confidence improved (6.3%; 0% one year earlier; 0 = neutral) reaching the most optimistic January level since 2014. Meanwhile, retail confidence remains firmly in optimistic territory at 29.3%, compared to 21.8% one year ago (no change from December). Going forward, we expect stable and low inflation along with a mildly expansionary monetary policy will likely support private sentiment

On Friday, the institute of statistics will release the unemployment rate for February. The January national unemployment rate of 12.8% was above the 11.8% recorded one year earlier. The urban unemployment rate increased to 13.7% from 13.4% (one year earlier). Meanwhile, job quality remains low as self-employment stays the primary job creator. We expect the urban unemployment rate in February to come in at 12.0% (11.9% one year before).

Next week, the fiscal rule committee will sit to evaluate Colombia’s fiscal targets. Under the current fiscal rule, Colombia has to reduce the deficit to 2.4% of GDP this year, from 3.1% in 2018, then gradually reduce it to 1% of GDP by 2027. However, the authorities have argued the committee should relax the target this year to allow the government to run a bigger deficit as it struggles to cope with the fallout of the humanitarian crisis in neighboring Venezuela.


Starting the week, INEGI will also publish January’s monthly GDP proxy (IGAE), which we forecast at 1.3% year-over-year (from 0.04% in December). We already know that industrial production fell 0.9% year-over-year in January, dragged by the mining sector (fall in oil output), while the manufacturing sector grew at a below trend pace. Moreover, we expect to see some effect of one-off factors (gasoline shortages and the strikes in some manufacturing firms).

On Tuesday, the statistics institute (INEGI) will announce January’s retail sales. We estimate that retail sales fell 0.4% year-over-year, from -1.3% in December. Private consumption indicators have shown a moderation, consistent with the recent weakening of the labor market. Moreover, we expect retail sales to be affected directly by gasoline shortages (happened from December 2018 to February 2019) due to lower gasoline sales and indirectly as access to stores become more difficult.

In the middle of the week, INEGI will announce February’s unemployment rate. We expect the unemployment rate to be 3.5%. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment slowed to 3.1% year-over-year in February (from 3.3% in January).

The same day, INEGI will announce February’s trade balance. We expect manufacturing exports slowed down, reflecting weaker external demand (plus the effect that the manufacturing strikes in the northern state of Tamaulipas had in manufacturing exports). Moreover, it will be important to monitor non-oil imports to get a better sense of the slowdown of internal demand.

The Central Bank of Mexico (Banxico) will hold a board meeting on Thursday, to decide on the reference rate. While Banxico is widely expected to remain on hold (at 8.25%), recent activity and inflation figures, combined with a looser monetary policy stance by the Fed, can lead the central bank to loosen communication somewhat, gradually paving the room for rate cuts. However, considering uncertainties over domestic policy direction and, to a lesser extent, trade relations with the U.S. persist, rate moves in the short term are unlikely. We expect two rate cuts in 4Q19, bringing the policy rate to 7.75% by the end of this year.

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