Itaú BBA - COLOMBIA – Monetary Policy Meeting: Stable rates, but BoP sneaks into the discussion

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COLOMBIA – Monetary Policy Meeting: Stable rates, but BoP sneaks into the discussion

April 26, 2019

Additional widening in the CAD or tightening of financial conditions could change the mood in the board

At the April monetary policy meeting, the third of the year, the central bank kept the monetary policy rate at 4.25%, as expected. The unanimous decision was communicated in an unusually short press release, which retained a neutral stance. A new element in the communiqué is the introduction of the balance of payments in the concluding paragraph (not present in more than a year) as one factor to monitor by the board. However, general manager Echavarría downplayed the modification during the press conference and has previously stated the effect of interest rates on external accounts is not clear, so we still see stable rates remaining the most likely scenario going forward.

The board highlighted that inflation is under control despite the upside surprise to the market in March. Analysts’ inflation expectations were broadly unchanged from the March meeting at 3.2%, while core inflation expectations remained below the central bank’s 3% target at 2.82%. During the press conference, Echavarria emphasized the board’s focus is on the core measure which excludes food and regulated prices, noting that it is well-behaved. Additionally, Echavarria highlighted the low currency depreciation pass-through effect on inflation.

Central bankers appear bullish on activity. The technical team reiterated its 3.5% growth forecast for this year (Itaú: 3.3%; 2.7% for 2018). Moreover, Echavarria noted during the press conference the technical staff expects activity to accelerate to around 4.0% during 2H19 (above the long term potential of close to 3.3%), so the output gap would close by the end of 2020. Additionally, both him and Finance Minister Carrasquilla noted that complementary information (imports of machinery and equipment; bilateral interaction with the business sector) pointed at a robust behavior of investment.

The board rolled over the USD 400 million cap for the accumulation of reserves in May. A separate press release announced the auction of put options (under the same rules laid out in September) will take place on April 30th. Regarding the reserve accumulation program, Echavarria indicated the CB has purchased USD 2.8 billion (including purchases of dollars from the Treasury), and reiterated there is no pre-set end date for the program.

With inflation pressures subdued, inflation expectations anchored, monetary policy rate close to neutral and the pace of growth recovery still restrained, we believe that the central bank will remain on hold throughout the year, at 4.25%. Echavarria downplaying the likelihood of interest rate cuts or hikes for the time being supports our call. As the Colombian economy is currently vulnerable to external factors, additional widening in the CAD or tightening of financial conditions could change the mood in the board. The next monetary policy decision will take place on June 21.
 

Miguel Ricaurte
Carolina Monzón



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