Itaú BBA - COLOMBIA – Monetary Policy Meeting: No rate moves in sight

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COLOMBIA – Monetary Policy Meeting: No rate moves in sight

Março 22, 2019

We only expect a rate hike by the end of the year

In its second monetary policy meeting of the year, the central bank of Colombia kept the reference rate at 4.25%. This was the seventh consecutive meeting the board has voted to leave the policy rate unchanged at 4.25%, once more with the support of all board members. The press release announcing the decision retained a neutral stance, hinting at stable rates for the time being.

The board appears upbeat about activity, noting that the output gap is narrowing. The technical team sees recent activity indicators suggesting a growth acceleration in 1Q19 compared to 4Q18 (despite weak coincident activity indicator growth in January released after the decision announcement) and improved the growth forecast for this year to 3.5% (seen at 3.4% in the 4Q inflation report; 2.7% last year). During the press conference, General Manager Echavarria added a novel insight: while medium term potential growth is estimated at 3.3%-3.4%, it is lower in the short-term (between 2.9%-3.0%). In this context, in the statement the central bank mentions that it expects the output gap to continue narrowing. Moreover, Echavarría said that he anticipates the output gap to be closed in 2020. We note that until very rec ently the central bank was communicating that growth was below potential, so the output gap was actually widening.

Meanwhile, inflation is well-behaved. Average core inflation measures moderated in February to 2.81%, while analysts’ inflation expectations also dropped but still remained somewhat above the 3.0% target.

The global outlook continued to deteriorate. However, higher oil prices supported the Colombian peso and sovereign risk premium moderated. Regarding the recent decision by the Fed, General Manager Echavarria noted that lower rates abroad could mean the neutral rate in Colombia could be below current estimates (4.5%-4.75%). Echavarría downplayed the option to cut rates at this time, adding he shares the market’s view that the next move is a hike (in September according to this month’s analyst survey).

The board renewed the USD400 million reserve accumulation scheme. A separate press release announced the auction of put options will take place on April 1st under the same rules laid out in September. We note that to date in March, USD 339 million has been accumulated by the central bank (so the program so far added USD 1.5 billion to reserves). The recent widening of the current account deficit (to 3.8% of GDP in 2018, from 3.3% in 2017) highlights the importance of mitigating external vulnerabilities in the absence of alternative instruments (such as the IMF’s FCL). However, Echavarria explained that presently, the current account deficit is not a central consideration for monetary policy decisions, adding that the effect of rates on external accounts is not clear.

A gradual domestic activity recovery, well-behaved inflation, a weak global economy and a looser policy stance by the Fed make rate hikes in the near term unlikely. A modest monetary stimulus and limited concern over the current account deficit also support stable rates. Hence, we expect the central bank hike only by the end of the year. The next monetary policy decision will take place on April 26.

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