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Colombia Monetary Policy September 2020

Colombia: BanRep cuts policy rate to a new historic low in September

On 25 September, Colombia’s Central Bank (BanRep) decided to cut the benchmark interest rate by another 25 basis points to a new historic low of 1.75%, amid divided market analysts’ expectations. The move marked the seventh consecutive cut, bringing the total reduction to 250 basis points since March. Notably, unlike the previous rate cut in August, which was a unanimous decision, September’s move was supported by four out of the seven board members, while the remaining three voted for a hold.

BanRep’s decision to yet again loosen its policy stance was largely driven by the continued contraction in economic activity—although the pace has softened as pandemic-related restrictions have been eased—and declining inflationary pressures. In its accompanying statement, the Bank noted that in light of the weak economic backdrop, with available data showing that the labor market and household disposable income deteriorated markedly in July, GDP is expected to decline between 6.0–10.0% in 2020. On the price front, subdued demand continued to push inflation down: It dropped for the fifth consecutive month to 1.9% in August (July: 2.0%), marking the lowest reading in over six years and undershooting the Bank’s target band of 2.0–4.0%.

Looking ahead, the Bank’s communiqué did not include strong forward guidance. Nonetheless, BanRep’s split decision signals that the easing cycle might be getting closer to its end, something that was also highlighted by Governor Juan José Echavarría in the post-meeting press conference.

With regard to the outlook for monetary policy, Daniel Velandia and Camilo Durán, analysts at Credicorp Capital, noted:

“We think that the upcoming decision by the BanRep will be data-dependent, and especially sensitive to the CPI data of Sep-20 to be released on 5-Oct, as potential upside surprises on this front would bring caution to the Board given the already relatively deep real policy rate of -0.73%. While we think that there may be some space for an additional cut, we do not consider it as our base case yet, waiting for additional information in the coming days to reassess the outlook for monetary policy if necessary.”

The next monetary policy meeting is scheduled for 30 October.

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