COLOMBIA – Monetary Policy Meeting Minutes: Minority fears falling behind the curve 

Uncertainty over transitory nature of inflationary pressures

Vittorio Peretti & Carolina Monzón


In the minutes of the September monetary policy meeting (in which the board decided to increase the policy rate by 25-bps, with three board members voting for a 50-bp hike), inflation expectations and the ongoing economic recovery were flagged as key factors to monitor in coming months. Board members agreed on the need to start withdrawing monetary stimulus as the economy recovers and excess capacity is reduced, inflation expectations increase, and the current account deficit continues to widen. However, the Board is divided on the appropriate magnitude of rate hikes required as part of the Board is still weary of further shocks from the pandemic, while others believe growing inflationary pressures justifies a more aggressive response to ensure inflation expectations are anchored in the medium-term.

On the inflation front, the Board emphasized the effect of transitory supply disruptions that have delayed convergence to the target, and the technical team now expects inflation at 4.5% and 3.5% by the end of 2021 and 2022, respectively (+0.4pp for both years from the last estimate). Hence, all Board members acknowledge that the real interest rate has become more expansionary as inflation expectations rise. Meanwhile, activity recovery is advancing more swiftly than anticipated. The technical team now foresees 8.6% and 3.9% growth in 2021 and 2022, respectively, 1.1pp and 0.8pp higher than the previous estimate. Finally, the current account deficit is seen moving from 3.6% of GDP in 2020 to 5.0% in 2021 and 4.5% in 2022 as internal demand recovers.

In this context, the majority that voted for a 25bp hike (four of seven members), emphasized the transitory nature of the inflation shock, inflation expectations that remained anchored in the medium-term horizon, and lags in the recovery of the labor market. Additionally, uncertainty on the impact of a potential new wave of COVID-19 virus also supported a cautious approach in the normalization cycle.

On the other hand, a minority group of three co-directors favored a rate hike of 50 bps, highlighting that core inflation expectations now exceed 3.0% and agreed that a larger adjustment on interest rates would contribute to the reaffirmation of the Board's compromise to the inflation target. This group of central bankers noted that postponing the required adjustments could lead to a more aggressive response later. Additionally, this group was uncertain over how transitory or permanent would the effects of current shocks be on inflation.

Our baseline scenario sees the policy rate ending the year at 3.0% and at 4.75% next year (around the estimated nominal neutral rate). With the economic reopening consolidating, inflation on the rise and large twin deficits, we expect the Central Bank to accelerate the pace of rate hikes to 50bps already in the next meeting. Although board members raised concerns over a further worsening of the pandemic, we believe that given the evolvement of economies to deal with mobility restrictions (as well as vaccination progress) the Board’s focus will be more squarely placed on inflationary risks going forward.

Vittorio Peretti 
Carolina Monzón