Itaú BBA - COLOMBIA - Monetary Policy Meeting Minutes: Standing its ground

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COLOMBIA - Monetary Policy Meeting Minutes: Standing its ground

August 2, 2019

The board likely needs to see confirmation of weaker activity and a looser global monetary stance, so rate cuts in the near term seem unlikely

In the minutes of the July monetary policy meeting, the board appears comfortable with stable rates at a “moderately expansionary” level. Activity is expected to accelerate in 2H19, but would be insufficient to close the negative output gap. Meanwhile, supply shocks are expected to transitorily lift headline inflation, but should not threaten the convergence to 3% expectation for next year. The board notes the weak global growth scenario, but partly counters that with the expectation of favorable global financial conditions. 

The board is at ease with inflation converging to the target in 2020. Low core inflation (below 3.0%), likely reflecting the slack in the economy, could be behind the expectation that high volatile prices (mainly food) are transitory. Additionally, in the recently published Inflation Report, the board indicated that the loose labor market (likely exacerbated by the migrant influx) could be keeping demand-side inflationary pressures contained. 

The board expects a weaker activity recovery, while also highlighting the rising unemployment rate. The Inflation Report confirmed the growth downgrade to 3% from 3.5% for this year. The document notes that after the activity slowdown in 1Q19, a recovery of public consumption and investment in civil works is seen leading the recovery ahead, but the unfavorable global environment is hindering investment decisions and the growth recovery. 

The board continues to see headwinds from the global and regional scenario. Reduced global investment and trade, along with lower trade partner growth in the region are mentioned risks. Nevertheless, the complex external environment is leading to looser monetary policy, supporting global liquidity (which could support EM currencies and finance external accounts). In the Inflation Report, the central bank revised its 2019 current account deficit expectation to 4.4% (4.3% previously) due to lower commodity prices and weaker growth from its trade partners. The board highlights this vulnerability, but notes FDI so far has been key to financing the CAD.  

We see the policy rate at 3.5% before the close of 1H20. However, we believe the board needs to see confirmation of weaker-than-expected activity, as well as the consolidation of a looser global monetary stance. So, rate cuts in the near term seem unlikely. The next central bank meeting will be held on September 27.

Miguel Ricaurte
Carolina Monzón


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