Itaú BBA - COLOMBIA – Monetary Policy Report – Narrower output gap could justify a modest policy tightening

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COLOMBIA – Monetary Policy Report – Narrower output gap could justify a modest policy tightening

Fevereiro 4, 2020

Despite a more gradual disinflation path now expected, inflation is viewed to be under control

The central bank technical staff’s quarterly monetary policy report shows the negative output gap is narrower than previously expected (on the back of robust domestic demand), while inflation is seen converging to the 3% target as supply shocks fade. In this context, the staff indicates that the next policy rate move would most likely be a hike, but there is no rush. A policy rate trajectory broadly in line with the results from the January analyst survey (stable until the beginning of 4Q20) is deemed coherent with the expected developments in the Colombian economy.

Activity forecasts were retained at 3.2% for 2019 and 3.3% for this year (Itaú: 3.3% and 3.1%, respectively). Favorable global financing conditions would support still dynamic domestic demand along with the positive effect from the tax reform on investment. Given the strong activity dynamics and the expectation that potential growth is somewhat lower (resulting from a reduced proportion of the working age population in the 2018 census), the estimate of the negative output gap was revised down (by 0.3pp, to -0.7%). This justifies General Manager Echavarría’s comments during the press conference following the January monetary policy meeting that the natural rate of unemployment is likely higher than previously anticipated.

Despite a more gradual disinflation path now expected, inflation is viewed to be under control (3.1% by yearend; 3.8% last year). Still elevated regulated price increases (in part due to higher oil prices) would slow the return of inflation to the 3% target. Although the output gap is narrower, core inflation is target-bound on the back of reduced pressures originating from FX depreciation.

A wide current account deficit is expected to persist this year (4.4% of GDP, similar to last year), but favorable global financing conditions would mean the bulk of the deficit financing remains FDI related. 

We do not expect rate moves this year. Broadly anchored inflation expectations would limit the need for higher rates. Meanwhile, activity growth that is likely to remain close to (or slightly above) potential and the evaluation that the negative output gap is somewhat narrower, reduces the need for lower rates ahead.
 

Miguel Ricaurte
Carolina Monzón



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