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

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COLOMBIA – Monetary Policy Meeting: Reinforcing stable rates

Novembro 27, 2020

The unanimous decision is consistent a prolonged period of rate stability.

In the second last monetary policy meeting of the year, the board of the central bank unanimously opted, for the second consecutive month, to keep the policy rate unchanged at 1.75%. The decision was widely expected by the market. While the communique announcing the decision was low on insight, the governor’s press conference conveyed a neutral tone, consistent with a prolonged period of rate stability in the absence of significant deviations from the expected recovery path.

Activity is gradually improving in line with expectations, while credit dynamics reflect the effective transmission of monetary policy. The most recent activity indicators suggest that the economy continues to recover at the pace outlined by the central bank in its recent monetary policy report. Governor Echavarria noted that the 3Q20 GDP data reaffirmed the technical staff’s expectation of a 7.6% decline this year (Itaú -7.0%). For 2021, the research team continues to see activity growing by 4.6% (close to our 4.7% expectation). Credit dynamics and market interest rates are responding to the easing cycle, an evolution that would support the recovery. However, the board remains concerned by the structural challenges in the labor market. Echavarria believes that a notable recovery of the labor market would mean an unemployment rate edging closer to regional peers (that is, dropping well into single-digits). 

Meanwhile, inflation expectations are well-behaved. Headline inflation moderated in October to 1.75% (a historical low), but inflation expectations for the 2021- 2023 horizon remained close to the target. At the meeting, the board also reaffirmed the inflation target at 3.0%, with a range between 2% and 4%. Meanwhile, global financing conditions remain favorable for the funding of the Colombian economy (through FDI and remittances), hence a sticky CAD was not viewed as a major concern.

Given the upcoming change of guard at the central bank and the perceived willingness to evaluate how the economy responds to past easing, we believe the rate-cut cycle has concluded. If the activity recovery underwhelms and inflation expectations retreat, possibly due to the onset of a second wave of the pandemic, a deeper easing cycle cannot be ruled out. The minutes for this meeting will be published on November 30, while the final monetary policy meeting of the year will take place on December 18.

Miguel Ricaurte
Carolina Monzón

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