Itaú BBA - COLOMBIA – Monetary Policy Meeting Minutes: Stable rates in line with slow activity recovery and wel

Macro Latam

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COLOMBIA – Monetary Policy Meeting Minutes: Stable rates in line with slow activity recovery and wel

mayo 6, 2019

The ongoing, but slow, activity recovery is concerning some board members.

The minutes of the April monetary policy meeting show a board that is comfortable with inflation, while the ongoing but slow activity recovery is concerning some board members. At the meeting, the board unanimously opted to keep the policy rate stable at 4.25% and retain a neutral tone. In line with previous comments from General Manager Echavarria, the board underplayed the wide current account deficit, highlighting its composition (investment-related imports) and financing (mainly FDI).

On the external front, downward revisions were made to Colombia’s trade partners growth, but a mild increase to the oil price forecast for this year was enforced. The recent global developments signaling looser monetary policy support the continuation of low cost international financing, helping reduce the risk premia for Colombia. 

Although inflation surprised to the upside in March, during 1Q19 inflation was below expectations at the start of the year. The widespread nature of the uptick was noted for March, but the supply-shock affecting food prices and rising regulated prices were highlighted. During the press conference following the meeting, Echavarria emphasized the board’s focus is on the core measure which excludes food and regulated prices. The minutes specify that inflation of this measure fell to 2.38% (far below the 3% target; since the meeting, it ticked up to a still low 2.57% in April). No notable concern was shown over inflation expectations that hover just above the target.

The activity recovery expectation was reinforced, but concerns are abound. A growth pick-up to 3.5% this year, from 2.7% last year is seen to be aided by dynamic internal demand and investment recovery. However, some board members are worried over the speed of the recovery process, weak labor market dynamics (and ambiguity about its drivers) as well as low commercial loan growth. The concern is in line with our view that the economy remains fragile and the recovery has not consolidated.

Despite another upside inflation surprise in April, pressures in our view remain transitory and are likely to unwind ahead. Hence, with inflation controlled, inflation expectations near the target, external risks still present and growth recovery slow, we believe that the central bank will remain on hold throughout the year, at a mildly expansionary level of 4.25%.

Miguel Ricaurte
Carolina Monzón

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