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Colombia Monetary Policy June 2020

Colombia: BanRep chops policy rate to new record low

On 30 June, Colombia’s Central Bank (BanRep) decided to cut the benchmark interest rate by 25 basis points to a new record low of 2.50%. The move marked the Bank’s fourth consecutive cut as it tries to support the economy amid a likely deep recession due to the Covid-19 pandemic and low oil prices. Notably, however, the pace of easing was reduced to 25 basis points compared to the previous three cuts of 50 basis points. In addition, the decision was not unanimous, with two board members voting for a stronger cut.

Falling inflation and a grim economic panorama fueled BanRep’s decision to cut rates once again in June. In its accompanying statement, the Bank stated that inflation expectations continued to drop in May and remain below the Bank’s 3% target due to the weak economic backdrop. In addition, the Bank stated that the labor market appears to have deteriorated notably compared to a month ago and that it expects a slow recovery in the country’s main trading partners. That said, concerns over the peso and the effect of real interest rates going into negative territory likely caused the Bank to refrain from cutting the rate by a stronger 50 basis points.

The next meeting will be held on 31 July.

Looking ahead, the Bank’s short communiqué was largely devoid of forward guidance; however, most of our panelists see the Bank trimming the policy rate modestly ahead to support the battered economy.

Commenting on Credicorp’s forecasts, director of research Daniel Velandia and analyst Camilo Durán add:

“We continue to expect the terminal repo rate of the ongoing cycle to be 2.25% after a 25bp cut […], though there are considerable risks of the repo rate reaching 2.0% or 1.75% this year. In our view, the latter will depend more on the behavior of local credit (in terms of all supply, demand, and rates) and financial markets, rather than in the short-term dynamics of inflation and activity. Specifically, the Board continues to be skeptical on the real effect a strong monetary easing could have on the economy under current conditions, which imply a weak demand for money, mainly from private economic agents.”

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