Itaú BBA - COLOMBIA – Monetary Policy Meeting Minutes: Debating caution and growth

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COLOMBIA – Monetary Policy Meeting Minutes: Debating caution and growth

May 12, 2017

The pace of future rate cuts remains unclear.

The minutes from the central bank’s April monetary policy meeting confirm that a deteriorated growth outlook, declining inflation expectations – resulting in an even more contractionary real rate – and disinflationary process underway, were behind the rate cut to 6.5% at the meeting. However, the 4-2 split in the board regarding the choice of a 50bp or 25bp cut was mainly due to the minority showing preference for a more cautious approach amid sticky inflation.

At the meeting, the technical staff lowered the country’s growth outlook for this year to 1.8%, from 2.0%, which seemingly convinced the majority of the board that a more aggressive action was warranted.Although the technical staff noted that some inflation measures (core and non-tradable) could suggest growing importance of indexation and wage growth on consumer prices, the board majority did not highlight these concerns. In fact, there was minimal argumentation by the majority to justify the increase to a 50bp cut (25bp in previous months). Hence, it is remains unclear whether the board will prefer faster easing in a bid to lower the real rate as quickly as possibly or if caution will reign if the stickiness of some inflationary measures persist.

Beyond sticky inflation, the minority at this meeting showed preoccupation with communication of monetary policy to the market. This group favored a gradual and prudent easing cycle (in the form of a 25 bps cut) as elevated inflation and persistent indexation could prevent the central bank from fulfilling its objective (3% inflation target) in the policy horizon. Moreover, they preferred not to surprise the market, as they considered this would reinforce the proper functioning of monetary policy transmission. The concern came after the central bank’s decisions surprised the market in three of the preceding four months (between December and March).

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% (100 bps below the current level). Disappointing growth and declining headline inflation will be arguments for larger rate cuts, however, the unfavorable behavior of core and non-tradable inflation measures will likely drive at least some in the board to call for a more cautious approach ahead. An additionally element of surprise will be the arrival of José Antonio Ocampo to the central bank this month (filling the seventh seat at the board). Therefore, we cannot rule the possibility the policy rate ends the year below our call.

Miguel Ricaurte

Vittorio Peretti



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