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Colombia Monetary Policy March 2021

Colombia: BanRep unanimously holds rate in March

On 26 March, the Board of Directors of Colombia’s Central Bank (BanRep) kept the benchmark interest rate unchanged at its record low of 1.75%, marking the fifth consecutive hold. The decision was in line with market expectations, but, unlike the two previous meetings in December 2020 and January, the decision was unanimous.

The Bank’s decision was underpinned by improved growth prospects for 2021 and came on expectations that inflation will average closer to the midpoint of the 2.0–4.0% target range this year and next. Although inflation came in at 1.6% for the third successive month in February, the Bank sees it rising ahead, and averaging 2.7% and 3.1% by end-2021 and end-2022, respectively. Meanwhile, improved domestic activity in Q4 2020 and in the first months of 2021, coupled with rosier prospects for the global economy, prompted the Bank to revise upward its 2021 GDP forecast from 4.5% to 5.2%. On top of this, the Bank’s decision was, to a large extent, influenced by its “confidence that Colombia’s Congress will approve a fiscal adjustment program sufficient to provide a return to economic growth and put the public finances back on a sustainable path”. More precisely, the government presented on 15 April a tax reform that will seek to raise approximately COP 23.4 trillion (about USD 6.4 billion and 2.0% of GDP) that will be used to address the socio-economic impact of the pandemic, thus further supporting the recovery in activity.

Looking ahead, the Bank’s communiqué did not include strong forward guidance. Once again, the Bank reiterated that external financial conditions remain favorable, but also highlighted that “a recent increase in medium- and long-term interest rates on international financial markets suggest that conditions have tightened on the margin”.

Daniel Velandia and Camilo Duran, analysts at Credicorp Capital, said:

“The final outcome of the tax reform to be submitted to Congress in the upcoming days is set to play an important role in the monetary policy reaction function ahead. [Central Bank president] Mr Villar said that the BanRep strongly supports the proposals to be included in the tax bill as a fiscal consolidation process is key for the future of the economy and investment. All in, we maintain our long-held view of an unchanged policy rate at 1.75% during the remainder of the year amid a controlled inflation and still very wide gaps in the economy.”

However, Sergio Olarte and Jackeline Piraján, economists at Scotiabank see hikes down the line:

“We affirm our expectation of the start of rate hikes at the September meeting as, by that time, economic growth would have consolidated, and inflation would have shown higher upside pressures that would make the real rate more expansionary than needed—triggering an adjustment of the current monetary policy stance to a more neutral ground.”

The next monetary policy meeting is scheduled for 30 April.

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