Itaú BBA - COLOMBIA – June inflation (temporarily) re-enters the target range

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COLOMBIA – June inflation (temporarily) re-enters the target range

July 6, 2017

The central bank will likely use the “window of opportunity” provided by the base effects of inflation to cut rates

Inflation came in below expectations in June. The monthly inflation (0.11%) was below our forecast of 0.19% and the Bloomberg market consensus of 0.20%. As a result, annual inflation re-entered the 2%-4% range around the target for the first time since January 2015. The fall in annual inflation (to 3.99% from 4.37% in May) was aided by base effects and will likely fall further in July, before starting to rise again as base effects become unfavorable. All things considered, underlying inflation measures remain sticky and far above the 3% target, which together with the already substantial policy rate cuts implemented mean that room for further monetary easing in the short-term is likely limited.

The month-over-month inflation was led by entertainment prices (2.85%), while housing and healthcare inflation (0.08pp contribution) also helped pull prices up in the month. The main drag on inflation in the month was food prices, which declined 0.21% from May (+0.5% in June 2016). This is the first monthly drop since October last year as the impact from the El Niño shock continues to unwind. The core measure excluding food posted a 0.25% increase, versus the 0.47% rise one year ago. Tradable good prices (excluding food and regulated items) gained 0.04% (0.49% in June last year). On the other hand, non-tradable prices (also excluding food and regulated items) rose 0.50%, broadly stable from the 0.54%, 12 months prior.

However, underlying inflation measures remain far above the 3% target on a year-over-year basis: non-tradable inflation (ex-food and regulated prices) fell only slightly to 5.21% (from 5.25% previously), while inflation excluding food items inched down to a still high level of 5.12% (5.35% in May). On the positive side, tradable inflation is responding to the better performance of the currency, reaching 4.4% year over year (down from 4.9% in May) and our diffusion index shows that now less than two-thirds of goods are increasing at a rate above the 3% target (the first time since August 2015).

We expect two additional 25-bp rate cuts this year (in the July and August meetings). In our view, the central bank will likely use the “window of opportunity” provided by the base effects of inflation, as August CPI (to be published on September 5) will likely show a year-over-year acceleration. In line with our view of limited additional easing, on Wednesday, the central bank general manager Echavarría warned that room for lower interest rates is getting smaller. Meanwhile, following the release of the inflation figures, finance minister Cardenas (who has been the most vocal board member on the need for lower rates and who has voted for 50-bp rate cuts) raised caution that further rate decreases are going to be more debated, slower, and gradual.


Miguel Ricaurte

Vittorio Peretti


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