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Stable rates in line with slow activity recovery and well-behaved inflation in Colombia

May 7, 2019

We believe that the central bank will remain on hold throughout the year

Talk of the Day


The minutes of the April monetary policy meeting showed a board that is comfortable with inflation, while the ongoing but slow activity recovery is concerning some board members. At the meeting, the board unanimously opted to keep the policy rate stable at 4.25% and retain a neutral tone. In line with previous comments from General Manager Echavarria, the board underplayed the wide current account deficit, highlighting its composition (investment-related imports) and financing (mainly FDI).

The activity recovery expectation was reinforced, but concerns are abound. A growth pick-up to 3.5% this year, from 2.7% last year is seen to be aided by dynamic internal demand and investment recovery. However, some board members are worried over the speed of the recovery process, weak labor market dynamics (and ambiguity about its drivers) as well as low commercial loan growth. The concern is in line with our view that the economy remains fragile and the recovery has not consolidated. With inflation controlled, inflation expectations near the target, external risks still present and growth recovery slow, we believe that the central bank will remain on hold throughout the year, at a mildly expansionary level of 4.25%.

Core inflation remained low in April. According to the central bank, the average of core inflation measures came in at 2.95% in April (2.82% previously), near the 3% target. Specifically, the board of the central bank focuses on the core measure which excludes food and regulated prices which ticked up to a still low 2.57% in April (2.38% previously). Overall, tradable good inflation (excluding food and regulated items) increased but remains the key drag to inflation at 1.16% (0.9% previously; headline inflation: 3.25%). Non-tradable inflation (also excluding food and regulated prices) edged up to 3.42% (3.29% previously). Meanwhile, the regulated component moderated in the month, gaining 5.78% yoy (6.42% previously). Low core inflation and a sluggish activity recovery are in line with our call of stable rates. 

Exports contracted in 1Q19, the first such case since 3Q16. Total exports fell 0.8% year over year in March (+6.2% in February), as oil exports accelerating to double-digit rates (as both volumes and prices recovered (unable to fully offset coal and coffee declines). In the 1Q19, total exports contracted 1.0% (+1.6% in 4Q18), as coal shrunk for the third consecutive quarter (-19.8% vs -15.4% in 4Q18). Meanwhile, oil exports slowed to 5.1% yoy (14.8% in 4Q18). At the margin, exports continued to fall but at a more moderate pace (-6.2% qoq/saar vs -12% qoq/saar in 4Q18). The weakening global economy and the gradual activity recovery have hampered the outlook for external accounts. We see the 2019 current account deficit at 4.0% of GDP (3.8% in 2018). With improving internal demand, a meaningful correction of the deficit is unlikely.


Activity in the first quarter of 2019 grew at its slowest pace since 2Q17. The monthly GDP proxy (Imacec) increased 1.9% yoy in March (1.4% in February), in line with the Bloomberg market consensus and a tick above our 1.7% call. Mining once more led the drag, contracting for the third consecutive month, while services is still driving the rest of the economy. Overall, Imacec growth slowed to 1.8% in 1Q19, from 3.6% in 4Q18. Although mining expectedly slowed in 1Q19, the moderation of non-mining activity (to its weakest year-over-year rate since 3Q17) shows the economy is fragile. At the margin, the economy also weakened in 1Q19 (to 0.4% qoq/saar, from 5.3% in 4Q18), despite a solid mining-led month-over-month gain in March. The weak activity at the start of the year is line with our view that growth would slow this year after posting an above-potential 4% last year. With activity sluggish, inflation and inflation expectations controlled and external risks still relevant, we continue to expect stable rates by the central bank for the time being (next meeting: May 08-09). Weakness in mining activity is likely due to transitory factors, but the recent moderation of business and consumer confidence amid elevated global risks pose a growing risk to our growth scenario of 3.2% for this year. Nevertheless, in an environment of low inflation, expansionary monetary policy and signs of some labor market recovery, an improvement of non-mining activity is still our baseline scenario. Official national account data will be published on May 20.
** Full story

The results of the central bank’s trader survey are in line with the outcome last month, retaining the view that stable rates for at least the next six months is the most likely outcome. The policy rate is still seen stable at 3% for the next 6 months, while one rate increase to 3.25% would come during the following semester, and 3.5% continues to be seen in 24 months. The US dollar is seen recovering some value (to 670 pesos per dollar; 680 spot) over the next month. Meanwhile, short-term (1 year) inflation is now viewed at 2.9% (2.8% previously), likely driven be expectations of higher electricity tariffs and gasoline prices ahead. Meanwhile, the relevant 2-year inflation forecast remained at 2.9% (3% target). We expect only one further 25-bp rate hike near the end of this year, taking the policy rate to 3.25%. Low inflation, the looser policy stance by the Fed and risks to global economic growth suggest there is no need to remove stimulus rapidly in the near term. Two further hikes during 2020 are expected assuming the economic recovery endures.

Day Ahead: The central bank will publish the trade balance for the month of April at 9:30 AM. We expect a trade surplus of USD 800 million (USD 770 million one year earlier). Additionally, nominal wage growth for March will be released. Wage growth in February picked up to 4.3% yoy (3.8% previously).


Inflation expectations for 2019 increased once again, according to the April central bank survey. Market participants forecast inflation at 40% for this year, up from 36.0% in March and 31.9% in February (median value). Inflation expectations for the next twelve months increased to 31.4% from 30.7% previously. Analysts expect consumer prices to increase by 25.2% in 2020, up from 23.0% in March. Core inflation expectations for 2019 also deteriorated. Pundits expect core item prices to increase by 40.1% (+5.0 pp over the March survey). Participants adjusted their core inflation projections up to 24.3% for YE20, from 22.0% previously. Participants expect higher inflation over the next three months than in the previous survey, likely in response to the depreciation of the peso against the dollar, and despite the government decision to freeze regulated prices. Average monthly headline inflation for the period April-June increased to 3.6%, from 2.9% in the previous survey. Inflation is expected to drop gradually to 2.2% mom in August (2% in the March survey). Expected average monthly core inflation also increased to 3.3 % for the quarter ending in June, from 2.8% previously. The survey showed that participants expect the yield of Leliqs to hit 50% by end-December, 5pp above the previous survey. Further exchange-rate instability and indexation in wage negotiations are the main upward risk to our inflation forecast (40% for this year). The central bank announced it will sell dollars even if the exchange rate is trading stronger than the upper bound of the non-intervention zone (51.45 ARS/USD). In this way, the central bank seeks to lower inflation through the stabilization of the nominal exchange rate, tight monetary policy, and some heterodox measures (freezing regulated prices and basic food prices). Given the low level of international reserves (around USD 17.5 billion or less than 4% of GDP) it will be challenging to prevent further depreciation of the currency if agents perceive a high probability of policy shift after the elections.


The BCB released its weekly survey with market participants (Focus) with lower growth expectations for 2019. According to the survey, the median forecast for GDP growth for 2019 declined 21 bps to 1.49%. This new wave of revisions follows the recent batch of weak economic activity indicators, as evidenced by March’s industrial production that posted a 1.3% mom/sa decline last week, missing market expectations (-0.6%). According to the Focus survey, growth expectations remained stable for 2020 and 2021, at 2.50%. The median of IPCA inflation forecasts oscillated to 4.04% for 2019 (from 4.01). For 2020 and 2021, the median of IPCA inflation forecasts did not change, at 4.00% and 3.75%, respectively. Similarly, the year-end Selic rate remained flat for the three years horizon (2019-2021): at 6.50% for 2019, 7.50% for 2020 and 8.00% for 2021.The median of the forecasts for the exchange rate remained flat for 2019 (at BRL 3.75/USD) and 2021 (at BRL 3.83/USD), while it has remained virtually stable for 2020: at BRL 3.80/USD (from 3.79).

Day Ahead: Anfavea’s auto production data for April will be released at 11:20 AM.


Day Ahead: At 10:00 AM, the Statistics Institute (INEGI) will announce February’s gross fixed investment, which we expect to decrease 3.5% yoy (from 1.7% in January).

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