Itaú BBA - COLOMBIA – Monetary Policy Meeting: A 50-bp rate cut and strengthening liquidity measures

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COLOMBIA – Monetary Policy Meeting: A 50-bp rate cut and strengthening liquidity measures

Março 27, 2020

Our call is for stable rates ahead, but risks are tilted to more easing.

The central bank of Colombia followed in the footsteps of global central banks and eased monetary policy, by 50-bps to 3.75%, in anticipation of a significant shock to activity following the social distancing measures undertaken amid the coronavirus spread. We, and the market consensus according to Bloomberg, anticipated the first rate move since April 2018. The decision had the full support of the central bank board and the tone of the communiqué and press conference signal that the entity is not closing the door to additional action if the economic scenario deteriorates further. During the press conference, General Manager Echavarria stated that he is not uncomfortable with a negative real interest rate scenario (the one-year, ex-ante real interest rate remains slightly positive). Nevertheless, he emphasized that within the board, there is no consensus on the trajectory of monetary policy as uncertainty remains high, while it is also unclear whether the latest developments imply changes to the neutral rate. Overall, Echavarria stressed that the current focus is ensuring the normal functioning of the financial system. In this context, the board also enhanced today the volume of liquidity measures recently announced and expanded the pool of players that can participate in REPO auctions.

The spread of the coronavirus along with the associated financial turmoil and expected economic disruption led the central bank to cut its policy rate. While economic data has yet to reflect the rapid deterioration of the global economy, the recently adopted measures to mitigate the pandemic outbreak suggest that impact on activity would be significant in 2Q20. On Tuesday March 24, Colombia started a 19-day lockdown, while the authorities announced economic measures to strengthen the health system and limit the economic impact on SMEs (delaying taxes) and Colombia’s poorest population (fast-tracking a VAT payback). Colombia lacks room to announce a substantial fiscal stimulus package without significantly deteriorating its debt metrics that could threaten its investment-grade sovereign credit rating. On this note, General Manager Echavarría downplayed the recent decision by rating agency S&P to downgrade the outlook of Colombia’s ‘BBB’ rating to negative.

While the central bank did not publish a revised growth outlook, Echavarria indicated that the two shocks affecting the economy, one from the virus and the other related to oil prices, would lead to a growth slowdown this year. On the inflation front, the general manager did not show major concern, noting that the expected activity slowdown along with broadly anchored inflation expectations would contain inflationary pressures. While we note COP depreciation poses a risk for the disinflation process, central bankers have recently highlighted the low pass-through coefficient experienced lately in Colombia.

Previously announced liquidity measures were built on to enhance the smooth functioning of the financial system. To help ease dollar liquidity concerns, the board added an additional USD 1.0 billion to its NDF program (totaling USD 2.0 billion) and another USD 0.4 billion of FX swaps auctions (to total USD 0.8 billion). Both operations are set to take place on March 30. Meanwhile, the central bank expanded the pool of participants that can take part in the REPO auctions, with public and private debt as collateral. The unemployment insurance fund and the national savings fund are the latest permitted participants, along with pension funds, brokerage firms, and trust companies.

While our call is for stable rates ahead, risks are tilted to more easing if the magnitude of the shock surprises or if the expected normalization of activity in 2H20 underwhelms. Wide twin deficits and the low oil price scenario amplify the vulnerability of the COP that may deter the board from lowering rates further. The next monetary policy decision will take place on April 30 and additional stimulus cannot be ruled out.

Miguel Ricaurte
Carolina Monzón

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