Itaú BBA - COLOMBIA - Monetary Policy Meeting: Growth concerns lead to a more aggressive rate cut

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COLOMBIA - Monetary Policy Meeting: Growth concerns lead to a more aggressive rate cut

April 28, 2017

The pace of future rate cuts will remain data dependent

The Central Bank of Colombia cut the policy rate by 50 bps, to 6.50%. The decision was once again by split vote, with four co-directors falling in the majority, while the remaining two co-directors opting for a 25-bp cut. This was the sixth consecutive divided board, with the decision surprising two-thirds of Bloomberg’s respondents, as well as us, who expected a 25bp rate cut. The disappointing activity and increased risk of an excessive slowdown supported the move, while core inflationary pressure - previously raised as an area of unease - persists. The balancing act between these factors means the speed of monetary easing will remain data-dependent.

Flagging activity convinced most in the board of a more aggressive action at this meeting. The press release announcing the decision highlights the disappointing activity in 1Q17 (industrial production, retail sales and consumer confidence), leading the technical staff to lower its 2017 growth forecast to 1.8%, from 2% previously (2% in 2016). Despite the measurement error regarding the output gap, the board considered the risk that excess capacity widens has increased.

Meanwhile, inflation is evolving in line with expectations, led by the dilution of previous supply-side shocks. In fact, the central bank’s medium-term inflation forecast has declined amid the recent disinflation. Meanwhile, falling inflation expectations have resulted in an even more contractionary real policy rate. These factors all favored lowering the policy rate. Nevertheless, the board does note that indexation mechanisms and the increased stickiness of some prices (as reflected by non-tradable inflation) could delay the convergence of inflation to the 3% target. The latter comment likely means this is not a permanent shift in the velocity of the expected loosening cycle.

We expect the central bank to continue lowering the policy rate, but the pace of rate cuts will be data dependent. We see the policy rate ending the year at 5.5% (7.50% in 2016).


 

Miguel Ricaurte

Vittorio Peretti



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