Itaú BBA - COLOMBIA – Monetary Policy Meeting: No surprise as rates remain stable

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COLOMBIA – Monetary Policy Meeting: No surprise as rates remain stable

January 31, 2019

Maintaining monetary stimulus is likely until there is clear evidence that spare capacity is diminishing

As expected, in the first monetary policy meeting of the year, the central bank of Colombia kept the monetary policy rate at 4.25%. The decision had the backing of all 7 board members, completing seven consecutive unanimous decisions, having started in April when the board voted to cut policy rate to the current level. The press release announcing the decision retained a neutral stance as it continues to reflect a board evaluating how current risks (uncertain external environment and an unconsolidated domestic recovery) could affect its baseline scenario, amid a well-behaved inflation.

Inflation is under control. The press release indicated that current inflation and expectations have registered few changes, remaining close to the central bank’s 3% target. During the press conference General Manager Echavarria mentioned the staff sees a broadly stable currency in the forecast horizon, which limits inflationary pressures going forward.

Meanwhile, the output gap is seen to remain negative this year. The press release reiterated the technical staff’s 2.6% growth forecast for 2018 (in line with Itaú) boosted by accelerating consumption and an investment recovery. Meanwhile, the board revealed its growth forecast for 2019 at 3.5% (Itaú: 3.3%), which considers a global economic growth moderation, lower trajectory for oil prices and financing law effects. Hence, with a still negative output gap, the board would likely favor maintaining the monetary stimulus until there is clear evidence that spare capacity is diminishing. 

The board continues to see the need to accumulate reserves. A separate press release indicated the continued auction of put options (USD 400 million cap, under the same rules defined since September) will take place on February 1st. Additionally, Echavarria announced the purchase of USD 1 billion from the Treasury. The accumulation of reserves follows the possible reduction of the flexible credit line with the IMF in 2020.

We do not see the board in any haste to decrease the monetary stimulus. The unanimous decision to stay on hold - amid a still fragile activity recovery, contained inflation and an uncertain external outlook - suggests stable rates for the time being. We expect a mild monetary normalization to unfold later this year (policy rate is not far from neutral levels, according to our view and to the central bank’s) as the activity recovery consolidates. The timing of the next movement will likely being data dependent while risks are tilted to less tightening (if any). Echavarria commented that the market is expecting two rate hikes this year (April and October). The next monetary policy decision will take place on March 29.

Miguel Ricaurte
Carolina Monzón

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