Itaú BBA - COLOMBIA – Monetary Policy Meeting Minutes: Arguing for stable rates

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COLOMBIA – Monetary Policy Meeting Minutes: Arguing for stable rates

julio 2, 2019

A widening output gap, controlled inflation and loosening global financial conditions will allow for lower rates ahead.

The minutes of the June monetary policy meeting, at which the board unanimously chose to hold the policy rate at 4.25%, reflects a scenario of stable rates. Growth dynamism is expected to pick up through the remainder of the year, inflation is seen returning to the 3% target in 2020 as transitory shocks unwind and external imbalances must be monitored. Nevertheless, we expect growth to disappoint, leading to a further widening of the output gap and limiting inflationary pressures that would justify rate cuts. Also favoring lower rates in Colombia is the global trend towards more easing, which would keep financial conditions favorable (mitigating external imbalance risks).

The board is concerned about geopolitical and trade tensions and noted that a deterioration of the global scenario could lead to monetary easing around the globe. Co-directors also highlighted volatile global financial conditions could be more relevant to Colombia given its vulnerabilities amid wide external account imbalances. For now, the board is satisfied with the composition of the CAD financing (FDI and portfolio flows).

Despite concern with labor market dynamics, the central bank continues to expect a recovery ahead. However, the technical staff cut growth forecasts for Colombia’s trade partners, a development that would drag activity down, while the labor market weakness remains a quandary.

The board is showing no major concern with inflation. Supply-side shocks affecting food prices are seen behind transitorily high inflation. Core inflation remains contained and below the 3% target and the board sees headline inflation converging to the target next year. Meanwhile, inflation expectations have edged up (to 3.3%-3.4% for short-term horizons), but remain close to the target.

We believe that the central bank will cut the policy rate to 4.0% before yearend. A widening output gap, controlled inflation and loosening global financial conditions provide space for a more expansionary monetary policy. The next monetary policy decision will take place on July 26.


Miguel Ricaurte
Carolina Monzón



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