Itaú BBA - COLOMBIA – Monetary Policy Meeting: Another 50bp rate cut, but no unanimity

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COLOMBIA – Monetary Policy Meeting: Another 50bp rate cut, but no unanimity

Maio 29, 2020

We see room for lower rates, but the board would prefer not to move more aggressively than already done.

A board majority voted to cut the policy rate for a third consecutive month by 50bps to 2.75%, a historic low given the rate reached 3% during the global financial crisis. The decision was widely expected in the market. However, while signs are that more easing is to come, two of the seven board members preferred a milder 25bp rate cut, possibly showing division over the appropriate end-point of the easing cycle.

The decision to lower rates further was justified by falling inflation, a loosening labor market, deteriorating activity perspectives and improving financing conditions. General manager Echavarria noted at the press conference announcing the decision that the possibility of negative real interest rates was not viewed as a concern (despite capital flight concerns raised by some members). We note, the ex-ante real rate, using the one-year inflation expectation from the May survey, is now already mildly negative. Echavarria reiterated the central bank’s expectation of low inflationary pressures (forecast range of 1% and 3% this year; 3% target), but downplayed the likelihood of a deflationary scenario. Meanwhile, Echavarria noted the shock to the economy has expectedly led to a sharp labor market loosening, while slumping imports are reducing Colombia’s external imbalances. 

The central bank did not announce any increase to its quantitative easing and liquidity measures (rather stating a renewal of expiring NDFs and swaps to maintain stocks). 

We see room to continue lowering rates. It is plausible the board prefers not to move more aggressively than already done, given capital flight concerns and the belief that lower rates are unlikely to have an immediate impact under the current conditions. However, the economic collapse underway would convince the board that additional monetary stimulus ahead is required to prevent permanent damage to the economy.

Miguel Ricaurte
Carolina Monzón

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