Itaú BBA - COLOMBIA – Monetary Policy Meeting: Stable rates, but edging towards easing

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COLOMBIA – Monetary Policy Meeting: Stable rates, but edging towards easing

junio 24, 2019

A widening output gap and controlled inflation would likely lead the central bank to cut rates.

As expected, the board of the Central Bank of Colombia kept the interest rate at 4.25% in June. The unanimous decision extended the longest period of stable rates (fourteen months) in the last ten years. Although Governor Echavarría stated that the board is not discussing the option of rate cuts, the press release hinted at a changing assessment of the economic scenario that could justify additional easing ahead.

A handful of dovish signs. Firstly, the reference that the current 4.25% rate is “slightly expansionary” was removed. Secondly, an explicit reference to the growth forecast of 3.5% for 2019 was not included. Moreover, Echavarria noted that current data did not change the forecast, he hinted an update would come in the next two months. Thirdly, the board expressed uncertainty over the size of the output gap and the speed that it would narrow (previously there was only doubt on the latter). Fourthly, the board is considering the impact of changing global conditions on the Colombian economy (previously, the board was uncertain regarding the effects). Finally, the board went out of its way to explain that higher short-term inflation is due to supply-side shocks (particularly, transportation disruptions affecting food prices) and likely transitory, while core measures remain close to the target.

The board sees mixed signals for consumption. While private consumption data remains upbeat, consumer confidence has disappointed. Additionally, Echavarria highlighted that a loose labor market is likely explained by low job creation rather than the Venezuela immigration flow. 

The board refrained from reigniting the reserve accumulation scheme. Last month, the board interrupted the auction of put options in order to evaluate the impact on the exchange rate, something the technical staff has not yet concluded according to Echavarria.

In our view, a widening output gap (we see growth at 2.6% this year) and controlled inflation would likely lead the central bank to cut rates. The fact the current policy rate level is most likely close to neutral reinforces our call. We expect one 25-bp cut, to 4%, before year-end, with 50 bps of further easing, to 3.5%, during 1H20. The vulnerabilities associated with the wide twin deficits (especially the current account deficit) are a key risk to our rates call. However, as authorities remain upbeat about the financing of the CAD and expect adherence to the fiscal rule (deficit of 2.4% of GDP, below the maximum allowed of 2.7%), we see space for the central bank to act. The next monetary policy decision will take place on July 26.


 

Miguel Ricaurte
Carolina Monzón



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