Itaú BBA - COLOMBIA – Monetary Policy Minutes - A neutral tone

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COLOMBIA – Monetary Policy Minutes - A neutral tone

February 8, 2019

We believe that the central bank will maintain its holding pattern for the time being and begin a modest hiking cycle only in 2H19

In the minutes of the January monetary policy meeting, the board appears comfortable with the inflation outlook while rising external risks are a concern. Overall, the board seems comfortable with the current mild expansionary level of the policy rate, signaling that under the current conditions there is no need to start the normalization cycle. 

Regarding activity, the board continues to view the recovery en course, although growth remains low.  Rising investment, elevated industrial production and retail sales along with some improvement in consumer expectations were highlighted as positives. We note that despite strong sector data, the coincident activity index (ISE) remains weak and hints that the recovery has yet to consolidate. Central bankers also believe the recently approved financing law could offset negative external impact by boosting investment dynamics ahead. Overall, the technical staff sees growth of 3.4% for this year, from 3.5% previously, as growth of its main trade partners is slowing (2.3% from 2.4%). Thus, the oil price forecast was cut to USD 63 per barrel on average for this year (USD 66.5 previously). 

The board is at ease with inflation. Well behaved inflation, ending last year at 3.18% and controlled core inflation measures were highlighted by all board members as a positive development. Looking ahead, a moderate El Niño phenomenon and contained Colombian peso depreciation would likely result in inflation remaining close to the 3.0% target this year and lower than the market is currently expecting (3.5%). 

The wider current account deficit is expected to be easily financed. The technical staff now expects a current account deficit at 3.7% of GDP in 2018 and 3.9% 2019. According to the background brief, a higher trade balance deficit and income deficit would contribute to a wider current account deficit (3.3% of GDP previously for 2018). However, better remittances and a smaller net service deficit would contain the widening. Many board members expressed concern about the wide current account deficit (we note that this in the past was a constrain for monetary policy easing). However, all board member highlighted that financing should not be a problem as long as the Fed retains its current stance and higher foreign direct investment materializes as expected. 

We believe that the central bank will maintain its holding pattern for the time being and begin a modest hiking cycle only in 2H19. The unanimous decision, still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term.  The next monetary policy decision will take place on March 29.


Miguel Ricaurte
Carolina Monzón

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