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Colombia Monetary Policy October 2020

Colombia: BanRep ends cutting cycle in October

On 30 October, the Board of Directors of Colombia’s Central Bank (BanRep) unanimously decided to leave the benchmark interest rate unchanged at a historic low of 1.75%. The decision, which was widely in line with market expectations, marked the end of a 250-basis-point easing cycle that started in March when the pandemic started to take its toll. Meanwhile, in an unanticipated move, Governor Juan José Echavarría announced his plans to retire from his position at the end of the year when his four-year term expires. BanRep’s decision was fueled by its assessment that its current expansionary stance is consistent with supporting the recovery and that inflation remains under control. The gradual relaxation of Covid-19-related measures, combined with fiscal stimulus and increased liquidity, are also supporting activity. Additionally, although labor market conditions remained dire in Q3, the elevated unemployment rate is expected to subside in Q4, in line with the economic recovery. On the price front, inflation remains subdued, edging up to 2.0% in September from August’s over six-year low of 1.9%, thus landing on the lower band of the Bank’s target range of 2.0–4.0%. Additionally, the Bank stressed that inflation expectations are seen remaining within target in 2021 and 2022.

Looking ahead, the Bank’s communiqué did not include strong forward guidance. In its statement, the Bank highlighted that external financing conditions remain favorable, despite elevated uncertainty regarding the trajectory of the pandemic. That said, during the accompanying press conference, Governor Echavarría underlined that the rate was likely to remain unchanged for several months.

Commenting on the outlook for monetary policy, Felipe Camargo, economist at Oxford Economics, noted:

“Although, according to our Taylor rule estimates, there may be further space for interest rate cuts, we think BanRep will adopt a more cautious stance and now keep policy on hold, given the highly uncertain outlook.”

Meanwhile, with regard to Governor Echavarría’s replacement, Daniel Velandia and Camilo Durán, analysts at Credicorp Capital, underlined:

“In recent months there has been some noise on the possibility of current MoF Carrasquilla taking his place, which could raise questions about the credibility/independence of the central bank, especially by foreign investors. […] For now, we do not expect Carrasquilla to be named the head of the BanRep, so the good reputation of the economic policy framework of Colombia will be maintained.”

The next monetary policy meeting is scheduled for 27 November.

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