Itaú BBA - COLOMBIA – Monetary Policy Meeting: The last cut of the year?

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COLOMBIA – Monetary Policy Meeting: The last cut of the year?

August 31, 2017

Going forward the board will likely remain divided

The central bank of Colombia cut the policy rate in August by 25 bps, to 5.25%, in line with our expectation and that of the vast majority of market analysts. However, the voting came in as a surprise. The decision was a three-way split, with two of the seven board members preferring a larger cut of 50 bps, one member opted for no rate move, while the remaining four members were in the majority. The press release announcing the decision notes that the current real interest rate is compatible with inflation converging to the 3% target in the relevant policy horizon. Furthermore, it says that some indicators suggest that the real rate is close to its neutral level (contrasting with previous statements, in which the central bank labeled the level of interest rate as tight). Speaking to the press, general manager Juan José Echavarría indicated that this could be one of the final rate cuts of the year (after a 250 bps easing cycle). This, added to the fact that some board members favored a larger cut, leaves open the possibility for some additional easing before yearend (departing from ours and market expectations).

With inflation expected to accelerate for the remainder of the year as the low base effects passes, it is likely that the two board members that voted for the larger 50 bp rate cut attempted to front-load the easing. In any case, within the board, there remains great uncertainty about what the neutral interest rate is and will likely contribute to continuing divisions within the board in upcoming decisions.

We expect the central bank to stay on hold until the end of this year, but we anticipate further easing to resume in the first quarter of next year (bringing the policy rate to 4.5%). In our view, the level of policy rate is still tight. In fact, Echavarría recently mentioned he saw a real neutral rate at 1.4%, which means a nominal neutral rate around 4.5% once inflation expectations fall to the target. Hence, as the economy continues weak and inflationary pressure fade, further rate cuts are likely. However, depending on how inflation unfolds for the remainder of the year, there exists a risk that the expected rate cuts are brought forward.

Miguel Ricaurte

Vittorio Peretti



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