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

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COLOMBIA – Monetary Policy Meeting Minutes: In observation mode

September 30, 2019

Wait-and-see mode as the board observes the development of high inflation, resilient activity and a moderating labor market.

The minutes from the unanimous decision to hold rates at 4.25% in September do not provide any indication of a change in the steady rates status quo. The policy rate is seen as being moderately expansionary, a view expressed for the most part since the policy rate reached current levels (April 2018), despite General Manager Echavarría noting at the press conference announcing the decision that the real neutral rate has likely fallen (around 20-bps to 1.2%) amid global rate trends. Overall, the board is in wait-and-see mode as it observes the developments of high inflation, surprisingly resilient activity, risks from external imbalances with the potential impacts from global headwinds, and a moderating labor market.

Inflation is viewed to trend back towards 3% during next year, as supply-side shocks dissipate. Meanwhile, growth in 1H19 was dynamic, unlike peers in the region, and a further acceleration is expected in 2H19. Increased loan growth was flagged as a positive development. Nevertheless, activity growth would still be insufficient to close the output gap. While deteriorating global conditions received some analysis, the minutes did not present the potential impact on the domestic economy. Board members reiterated concern with the labor market evolvement, but highlighted some mild improvement in urban indicators (the analysis was before the release of August data that showed renewed weakness).

Regarding the wide current account deficit, the board weighed its favorable financing against its negative implications. For now, the board highlights foreign direct investment is financing the CAD, while also noting that global monetary policy supports financing conditions. No reference was made of the recent Colombian peso weakening.

We expect stable rates for the remainder of the year. Still, we see the balance of risks titled towards rate cuts rather than hikes ahead. If the deterioration of the global environment filters through to the local economy in coming quarters, rate cuts will likely be considered.


Miguel Ricaurte
Carolina Monzón

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