Itaú BBA - COLOMBIA - Monetary Policy Meeting Decision: A discontinuous easing cycle

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COLOMBIA - Monetary Policy Meeting Decision: A discontinuous easing cycle

January 27, 2017

The timing of each rate cut will likely be data dependent.

The central bank of Colombia surprised the market by leaving its policy rate unchanged in the first monetary policy meeting of the year. Following the earlier than expected rate cut in December, the market was near unanimous in its expectation for a 25 basis point rate cut. However, the central bank opted to leave the policy rate at 7.5%. The decision was once more by majority, with a swing from the 4-3 vote in favor of a rate cut last month, to a 4-3 split in favor of staying on hold. Juan José Echavarría led the meeting for the first time.

According to the new Central Bank Chief, the board agrees that there is a need for monetary easing, but there is disagreement on the timing and speed of rate cuts. The board acknowledges that the real interest rate is above the historical average since 2005, and that activity remains weak (2016 growth forecast lowered to 1.8% from 2.0%, previously). However, the majority of the board appears concerned by inflation expectations. Following the approval of the tax reform and the upside surprise in December inflation, the central bank’s analyst survey earlier this month showed the 2017 inflation expectation inched up to 4.5% (4.2% previously). The central bank has been targeting 2017 inflation within the 2%-4% target range. Governor Echavarría noted that he wants to reach the inflation target as soon as possible, with a 40% to 50% chance of hitting the 4% self-imposed target by yearend. The board also noted the increased uncertainty on global financial conditions since the previous meeting, supporting a more a cautious approach to the speed of the easing cycle.

The central bank board is set for another change. Today’s meeting was the last for board member Carlos Gustavo Cano (openly against rate cuts amid above-target inflation expectations). President Santos will replace Cano, who has completed the maximum 12-year stay, as well as one other member of his choice in the upcoming weeks. So, the composition of the board could turn more favorable to rate cuts.

A negative output gap and the fading of supply side shocks on inflation support the call for further easing ahead. We expect the policy rate to reach 5.5% by yearend. Yet, the timing of each rate cut will likely be data dependent. 



Miguel Ricaurte

Vittorio Peretti


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