Itaú BBA - COLOMBIA – Monetary Policy Decision: The easing cycle has likely ended

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COLOMBIA – Monetary Policy Decision: The easing cycle has likely ended

October 30, 2020

Developments on the global front highlight that significant uncertainty persists

In line with the market consensus, the board of the central bank held the policy rate steady at 1.75%, the first interruption to an easing cycle initiated in March and that has extended 250bps. In the clearest sign that this is the start of a prolonged pause, the decision had the unanimous support of the board (versus the 4-3 split in September). The communique held a neutral tone. There was no further insight at the press conference as the unforeseen announcement that governor Echavarria would not pursue a second-term at the bank’s helm after his four-year stint concludes this year led to no media interaction.

From the press release,
we can conclude that the board is not concerned by the current low level of inflation, as inflation expectation point to a convergence towards the 3% target ahead.
The easing of mobility restrictions, fiscal stimulus and significant liquidity in the economy are supporting the activity recovery (the technical staff forecasts an 8.5% drop this year and a bounce back to 4.1% in 2021). However, the board remains concerned by the still elevated unemployment rate, while anticipating a recovery to consolidate in the last quarter of the year. We note that labor market data released today for September show job and participation gains are underway.


Developments on the global front highlight that significant uncertainty persists.
The board noted that the recent evolution of COVID-19 and the latest containment measures taken by governments have increased global risk premia. However, they note that financing conditions for Colombia remain favorable and acknowledge an effective policy transmission to the domestic credit market is underway, helping to soften the impact of the shock on the Colombian economy.


The announcement that governor Echavarria will not seek reelection creates some uncertainty for the coming months.
We expect Echavarria to participate in the final two meetings of the year before his term expires. During this period, the board will elect a replacement (it is not a political appointment, like co-director posts).


We believe the board will keep rates at 1.75% for some time, as they evaluate how the economy responds to the reopening of the economy.
Additionally, the announcement of governor Echavarria’s departure likely supports stability, at least during the succession period. The labor market recovery and inflation convergence also support the rates on hold call. Nevertheless, we cannot rule out further cuts ahead if the activity recovery underwhelms and inflation expectations retreat, likely due to the onset of a second wave of the pandemic.

Miguel Ricaurte
Carolina Monzón



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