Itaú BBA - COLOMBIA - Monetary Policy Meeting Decision: Strike Three

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COLOMBIA - Monetary Policy Meeting Decision: Strike Three

February 24, 2017

The rate cut reinforces our view of the policy rate at 5.5% by yearend

The central bank of Colombia surprised the market for the third consecutive month by cutting the policy rate by 25-bp to 7.25%. We, alongside 71% of the analysts surveyed by Bloomberg, were expecting the central bank to stay on hold following the decision to keep rates on-hold the previous month. Considering that concern over rising inflation expectations was the justification for not lowering the policy rate in January, the subsequent increase in the 2017 measure since that meeting makes today’s decision a curved ball. Additionally, the 4Q16 GDP out this week surprised to the upside. The decision was once more by majority, with a swing from the 4-3 vote in favor staying on hold in January, to a 4-2 split in favor of rate cuts. Gerardo Hernández, set to replace Carlos Gustavo Cano (likely in the majority last month), was not able to participate in today’s meeting.

In the press conference, both Finance Minister Cardenas and Central Bank General Manager Echavarría mentioned the sharp fall of consumer confidence to a historical low as the key factor behind the rate cut. Also, the board warns in the press statement that if this is reflected to private consumption, growth in 2017 could be around 2%, representing no recovery from last year. In spite of the rising 2017 inflation expectations, Echavarría noted that the effects of the inflationary shocks are diminishing and said that there was now a 45%-55% chance that 2017 inflation hits the self-imposed 4% target (up from 40%-50% last month). While the most likely scenario has the policy rate falling in coming months, as mentioned explicitly by Echavarría, the debate will be over the speed. Echavarría seems to favor a discontinuous rate cut cycle.

While the February rate cut came as a surprise, it reinforces our view that the policy rate will end this year at 5.5%. The timing of rate cuts has become more unpredictable. Still, the negative output gap, the fading impact of supply-side shocks on inflation and the currently high real interest rate support further easing ahead.


 

Miguel Ricaurte

Vittorio Peretti

 



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