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Colombia Monetary Policy December 2020

Colombia: BanRep decides third consecutive hold in December

On 18 December, the Board of Directors of Colombia’s Central Bank (BanRep) kept the benchmark interest rate at the all-time low of 1.75%. The decision marked the Bank’s third consecutive hold and came in line with market analysts’ expectations. However, the decision was not unanimous, with two of the seven board members voting for a 25-basis-point cut. Meanwhile, the meeting was the last for Governor Juan José Echavarría, who will be replaced by Leonardo Villar Gómez on 4 January.

The decision was driven by the Bank’s assessment that inflation will return to target in the medium term, coupled with signs of an ongoing economic recovery. Economic activity contracted at the softest pace since March in October, and although pandemic-related risks still persist, the recovery is expected to continue in 2021. On the price front, inflation dropped to a historic low of 1.5% in November following October’s 1.7%, undershooting analysts’ expectations. As such, two board members voted for a rate cut, arguing that November’s reading stemmed from a larger-than-estimated output gap and thus warranted further easing. However, the majority of the Board stressed that while inflationary pressures were expected to remain subdued until Q1 2021, they would rise to 2.7% by the end of 2021 and end 2022 at 3.0%—the midpoint of the Bank’s target band.

Looking ahead, the Bank’s communiqué did not include any strong forward guidance. BanRep reiterated that external financing conditions were favorable and during the accompanying press conference, Governor Echavarría highlighted that the Board’s future decisions will largely depend on incoming data, particularly with regard to inflation and the labor market.

Commenting on the outlook for monetary policy, Daniel Velandia and Camilo Durán, analysts at Credicorp Capital, said:

“Of course, new rate cuts are not off the table following today’s vote, but we think that the Board will only consider the move if there is a stronger downside move on observed inflation and, more importantly, on expectations, such that the real monetary policy rate increases sharply from its current levels.”

Meanwhile, analysts at ScotiaBank exclude the possibility of any rate cuts in the next year, but highlight that upcoming changes to the Board’s structure could reshape BanRep’s monetary stance:

“Although November inflation surprised on the downside and led to a revision in our end-2020 projection from 1.8% y/y to 1.4% y/y, with level effects expected to keep headline annual inflation low in early-2021, continued re-opening of economic activities next year should have prices tracking back toward the BanRep’s target by mid-2021 without necessitating any further easing. We expect the BanRep Board to remain on hold until Q3-2022, though changes to the Board next year (i.e., possibly two new members in addition to the Governor) could shift the balance of hawks and doves.”

The next monetary policy meeting is scheduled for 29 January.

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