Itaú BBA - COLOMBIA – Monetary Policy Meeting: Reverting to a 25-bps rate cut

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COLOMBIA – Monetary Policy Meeting: Reverting to a 25-bps rate cut

May 26, 2017

The central bank would continue lowering the policy rate, but the pace of rate cuts (potentially including pauses) remains data dependent.

The central bank of Colombia continued with the monetary easing cycle by cutting the policy rate by 25 bps, to 6.25%, in its May decision. The decision was in line with the majority of analysts surveyed by Bloomberg but less than the 50-bp expected by us. The decision was the seventh consecutive split vote, with four co-directors falling in the majority, while the remaining three members preferred a 50-bp cut. This meeting marked the arrival of José Antonio Ocampo to the central bank, returning the board to its full representation of seven members for the first time since the January meeting this year. The press release announcing the decision does not vary significantly from last month. However, the removal of the reference to falling inflation expectations hints that the results from the central bank’s May survey, which showed an inflation expectation tick-up at all measured horizonsfollowing the April inflation upside surprise to the market, was a key factor behind the return to the more conservative approach. The board notes that the risk of a further activity slowdown remains; therefore we believe that rate cuts remain the preferred course of action.

The central bank considered the uncertainty of the speed of inflation’s convergence to the 3% target as a basis for its decision. Inflation in April was broadly stable (4.66%), with the behavior of indexation mechanisms and increased inflation persistence being reflected in sticky core inflation. According to the central bank’s May survey, analysts’ 2017 inflation expectation moved to 4.38% from 4.30% in the April survey. Meanwhile, the 2018 inflation expectations rose to 3.5% (3.4% previously). The 2-year horizon inflation expectation also increased to 3.31% from 3.21% last month.

However, the central bank noted once again that recent data has increased the possibility of a wider output gap, although uncertainty over the amount of slack is elevated. Activity disappointed in 1Q17 (1.1% vs. 1.3% expected by the central bank’s technical staff), while recent industrial confidence dropped to its lowest April level since 2009. Meanwhile, consumer confidence has improved but is still near historical lows. 

We expect the central bank to continue lowering the policy rate, but the pace of rate cuts (potentially including pauses) remains data dependent. We see the policy rate ending the year at 5.5% (75-bp below the current level). Disappointing growth and declining headline inflation will be arguments for rate cuts, while the unfavorable behavior of core and non-tradable inflation measures will likely generate some caution.


 

Miguel Ricaurte

Vittorio Peretti

 



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