Itaú BBA - COLOMBIA – Monetary Policy Meeting: A split stay-on-hold decision

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COLOMBIA – Monetary Policy Meeting: A split stay-on-hold decision

December 18, 2020

A split board and the change in guard mean a deeper easing cycle cannot be ruled out

In the final monetary policy meeting of 2020, the board of the central bank opted to keep the policy rate unchanged at 1.75%, as widely expected. This is the third consecutive meeting of rate stability, following the 250-bp easing cycle, but the first split decision during that period. The minority in the 5-2 vote favored increasing the monetary stimulus by further lowering rates (by 25bp). The board’s division and the upcoming change of guard mean that a deeper easing cycle cannot be ruled out, particularly if there is a perceived risk of inflation expectations becoming de-anchored and the activity recovery underwhelms.

Low inflationary pressures support keeping the door open for additional easing. At the press conference announcing the decision, Governor Echavarria hinted that the large downside inflation surprise in November was a key factor behind the two co-directors favoring rate cuts. November inflation sat at 1.49% YoY as consumer prices fell from October. Nevertheless, Echavarria stated that the medium-term inflation expectations were broadly unchanged near the 3% target (2.7% for 2021 and 3% for 2022), a factor supporting rate stability amid further observation. We note that the inflation moderation has in large part occurred on the back of VAT-free sales days and subsidies to utilities, which are likely to unwind ahead.

Activity indicators are in line with the central bank’s recovery expectation. Credit dynamics and market interest rates are responding to the easing cycle, an evolution that would support the recovery process during 2021. On the external front, the advancement on vaccines supports a more favorable external environment, while still favorable global financing conditions aid the financing of the Colombian economy (through FDI and remittances).

The central bank also communicated that next year the monetary policy meeting schedule would return to the eight rate meetings per year format adopted in 2019. Policy rate-decision meetings will take place in January, March, April, June, July, September, October and December, but the board could take rate decisions at other meetings if needed, with any board member allowed to request this change.

A partly renovated board during 2021 will add a level of uncertainty to the favored policy stance. Leonardo Villar will assume the governorship of the central bank at next month’s meeting. Elected by the board in an extraordinary meeting one week ago, his highly technical background makes Villar a strong addition to the central bank board. Additionally, co-director Galindo will be replaced after resigning from his post earlier this month. Finally, President Duque can substitute two further members of the board during 2021.

We expect rates to remain stable for a prolonged period at the historically low level of 1.75%. Our assumption considers a gradual activity recovery that will support inflation converging towards the 3% target during 2021. However, we cannot rule out additional rate cuts, particularly if persistently low inflationary pressures lead to medium-term inflation expectations deviating significantly from the target.

Miguel Ricaurte
Carolina Monzón

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