Itaú BBA - COLOMBIA – Monetary Policy Meeting: Reinforcing stable rates

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COLOMBIA – Monetary Policy Meeting: Reinforcing stable rates

Janeiro 31, 2020

Inflation balance of risks remains symmetrical.

In the first monetary policy meeting of the year, the central bank of Colombia kept the reference rate at 4.25%. The decision, which extended the period of stable rates to 21 months, had the backing of all 6 participating board members. Arturo Galindo (who replaced José Antonio Ocampo) did not participate in the meeting. The tone of the press conference and communiqué remained neutral, providing no indication that a change to the status quo is approaching.

On the international front, the central bank is expecting a broadly stable Colombia peso in the short-term and a modest appreciation in the medium-term. While the level of the exchange rate is of no concern (hinting that intervention is unlikely), the accumulated depreciation still poses an inflation risk. Meanwhile, the board would monitor how the evolvement of the Coronavirus could affect activity and price dynamics in Colombia.

The activity recovery continues, narrowing the negative output gap. The technical team reiterated its activity forecast of 3.2% for 2019 and at 3.3% for this year. During the press conference, General Manager Echavarria noted that consumption continues to grow at a fast pace, despite the low consumer confidence. He added that the Venezuelan immigration could be behind robust consumption, noting an estimated contribution of up to 1pp to activity growth last year. Considering these elements, the mismatch of robust consumption and stubbornly high unemployment could point to a higher structural unemployment rate (and, thus, a narrower output gap) than previously envisioned by the technical staff.

Inflation is under control. Central bankers expect the supply shock from food prices to continue to fade, while noting that average core inflation remains close to 3.0% and inflation expectations foresee convergence to the target.

We believe that the central bank will remain on hold for some time. Broadly anchored inflation expectations would limit the need for higher rates. Meanwhile, activity growth that is likely to remain close to potential and the evaluation that the negative output gap is somewhat narrower, reduces the need for lower rates ahead. The minutes of this meeting and the inflation report will be released next Monday.


Miguel Ricaurte
Carolina Monzón

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