Itaú BBA - COLOMBIA – Monetary Policy Meeting: A consecutive 50-bp cut

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COLOMBIA – Monetary Policy Meeting: A consecutive 50-bp cut

Abril 30, 2020

Given the drastic outlook deterioration, we see room for at least one more 50-bp rate cut to 2.75%

At the April monetary policy meeting, the central bank board unanimously opted to ease monetary policy further with a 50-bp cut to 3.25% and reinforced liquidity measures. The decision on the policy rate was widely expected by the market. While the communique is low on insight, the tone from general manager Echavarria’s press conference signals that the door is open to more easing.

The expected deterioration of domestic demand is key behind increasing monetary stimulus, although there is acknowledgement that lower rates are unlikely to have an immediate impact under the current conditions. Echavarria added that a cautious easing cycle was being undertaken (compared to its peers), as there remains significant uncertainty. Our take from this messaging is that the board sees little short-term benefits from lowers rates, so rather than frontloading the monetary stimulus, it is gradually laying down a favorable groundwork that can be utilized once there is some normalization on the health front. Next week, the central bank will release its updated economic forecasts. Echavarria expressed the board is anticipating a significant contraction in 2Q20, with a recovery underway by yearend. Near the end of March, Colombia started a nationwide lockdown that has been extended until May 11. Meanwhile, oil prices have plummeted and will affect both external and fiscal accounts. Prior to the dual shocks, the board was expecting growth for this year to be at least as strong as the 3.3% recorded last year.

The board reinforced liquidity measures to guarantee the smooth functioning of the financial system. To ease dollar liquidity tightening, the board added an additional USD 1.0 billion to its NDF program (totaling USD 3.0 billion) and increased the FX swap auctions by USD 0.4 billion (to USD 1.2 billion). Forwards expiring next month will be renewed. Additionally, the central bank increased the approved players that can act as open market operation agents and eased the conditions for the transitory liquidity support measure.

We expect additional monetary policy easing. Given the drastic outlook deterioration for the Colombian economy, we see room for at least one more 50-bp rate cut to 2.75% despite still significant vulnerabilities. Meanwhile, the board will continue to utilize its other monetary policy tools to ensure no significant tightening of financial conditions that could exacerbate the effect of the current shocks on the Colombian economy. The next monetary policy decision will take place at the end of June, but we note General Manager Echavarría did not rule out a rate decision taking place at the May gathering.


 

Miguel Ricaurte
Carolina Monzón



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