Itaú BBA - COLOMBIA – Monetary Policy Meeting Minutes: Comfortably on-hold

Macro Latam

< Back

COLOMBIA – Monetary Policy Meeting Minutes: Comfortably on-hold

April 1, 2019

We believe that the central bank will remain on hold for the time being and move closer to neutral rates only later this year.

In the minutes of the March monetary policy meeting, the board appears positive overall about the economic outlook despite the continued deterioration of the global scenario. The minutes retained a neutral tone, likely signaling there is no rush to move rates in the near term. Hence, we continue to expect only one rate hike to 4.5% near the close of the year.

The board welcomed the evolution of inflation. All inflation measures are behaving better than expected, reaffirming its 3.0% (the target) yearend expectation. Meanwhile, inflation expectations remain somewhat above the central bank’s target. The board sees limited upside risks coming from the El Niño weather phenomenon, exchange rate depreciation or effects from minimum wage revisions.

Additionally, the output gap is seen closing faster than expected. For 1Q19, the technical staff is expecting growth at 3.2%, close to the economy’s potential, led by dynamic internal demand. Accordingly, growth of 3.5% for this year is now expected (upgraded from 3.4%; Itaú: 3,3%), so the central bank sees the output gap closing faster than previously expected. In fact, General Manager Echavarria recently went as far as to say the output gap would be fully closed in 2020. Despite the overall positive tone, part of the board highlighted its worries with weak labor market dynamics, a development whose causes are still unclear. Moreover, some board members saw the recovery evolving below their expectations.

However, the current account deficit is seen widening but to be fully funded. The technical staff estimates the current account deficit to come in between 3.9% and 4.7% of GDP this year, with 4.3% as the most likely scenario (revised from 3.9% previously; Itaú 4.0%). According to the background brief, as activity accelerates, imports would contribute to a wider current account deficit which is consistent with favorable outlook for internal demand. Additionally, terms of trade could have a negative impact over exports. During the press conference announcing the decision of this meeting, Echavarria explained that presently, the current account deficit is not a central consideration for monetary policy decisions, adding that the effect of rates on external accounts is not clear.

We believe that the central bank will remain on hold for the time being and move closer to neutral rates only later this year. The only-gradual activity recovery and well-behaved inflation suggest there is no need for rate hikes in the near term amid a still sluggish global economy and a looser monetary policy stance by core central banks.



< Back