Itaú BBA - COLOMBIA – Monetary Policy Meeting Minutes: In data dependent mode

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COLOMBIA – Monetary Policy Meeting Minutes: In data dependent mode

May 7, 2018

Favorable condition will provide room for additional monetary easing.

The minutes of the April monetary policy meeting show a central bank that is balancing the expectation of a firm activity rebound with faster than anticipated disinflation and moderating inflation expectations. At the meeting, the board unanimously reduced the monetary policy rate by 25bps to 4.25%. Overall, the tone of the minutes is neutral, hinting that upcoming decisions will be data dependent. The recent upside inflation surprise in April will likely give General Manager Echavarria’s cautious message some additional weight, particularly since food partially led the surprise and has been flagged by Echavarria as a risk going forward. Nevertheless, the latest food increase could be a reflection of the Easter holiday and so a retreat in May is likely.

The technical staff sees a notable activity recovery ahead. Growth of 2.7% this year, from 1.8% last year, with a further recovery to 3.7% next year is the baseline scenario. Favorable financing conditions, commodity prices and better global demand will aid the pick-up. The technical staff sees upside risks to growth this year on the back of better than expected oil prices. Some board members highlighted the improvement of some sectors of the economy (commerce and tourism) but note the still weak evolvement of the key construction sector. Some co-directors reiterated that despite the growth recovery ahead, below potential rates mean that the negative output gap continues to rise (favoring the rate cut decision). 

The disinflation process has outpaced expectations. Board members point to the strong Colombian peso as a major reason behind this development as well as for the inflation expectation correction. However, it was noted that there is large uncertainty over future movements of the exchange rate. Nevertheless, a rate cut at the April meeting helped offset a rise in the real interest rate and keep it moderately expansionary, according to some members. 

We believe core inflationary pressures will continue to diminish, amid a negative output gap and a strong currency, providing room for an additional 25-bp rate cut to 4.0%. The next monetary policy meeting takes place on June 29.

Miguel Ricaurte
Vittorio Peretti

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