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Colombia Monetary Policy July 2020

Colombia: BanRep cuts policy rate to new record low in July

On 31 July, Colombia’s Central Bank (BanRep) decided to cut the benchmark interest rate by 25 basis points (bp) to a new record low of 2.25%. The move matched market analysts’ expectations and marked the Bank’s fifth 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, the vote was unanimous, contrasting the previous meeting when some members of the Board had voted for a stronger 50 bp decrease in the policy rate. The Board’s agreement likely signals that any further cuts will be moderate and that the Bank is nearing the end of its easing cycle.

Below-target inflation and a grim economic panorama fueled BanRep’s decision to cut rates once again in July to help spur a recovery. In its accompanying statement, the Bank stated that inflation expectations continued to drop in June and remain below the Bank’s 3% target. In addition, the Bank reiterated that the labor market appears to have deteriorated notably and added that global economic uncertainty remains high. Following the meeting, on 3 August, the Bank unveiled updated forecasts, stating that it expects GDP to plunge around 8.5% this year and grow close to 4.1% next year. However, the Bank stressed that there is a large degree of uncertainty around its projection and unveiled a wide forecast interval, stating that the drop could be as large as 10.0% and as small as 6.0% in 2020.

Looking ahead, the Bank’s short communiqué was devoid of strong forward guidance; however, in the accompanying press conference Governor Juan José Echavarría hinted that BanRep could be getting close to the end of its cycle. That said, the governor stated that he is not concerned over the impact of real negative rates, causing some analysts to speculate more mild easing is ahead.

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

“All-in, we reaffirm our forecast of a terminal rate of 1.75% to be reached in the next two months, below the current market consensus of 2.00%. In our view, and related to the remaining space of easing, one of the key takes from Governor Echavarría’s press conference was the mention that the uncertainty around the future monetary policy decisions is higher as the repo rate is lower, suggesting that a major further easing has a low probability of occurrence, in line with current market expectations.”

Given this, and consistent with our interpretation of the overall tone of this meeting, we maintain our forecast for BanRep to deliver one more 25bp cut in August, pausing the easing cycle at 2%. We see the policy rate stable at this level until 2H21; we forecast modest year-end hikes in line with our call for an upward move in inflation back closer to the target midpoint.”

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