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Colombia Monetary Policy March 2019

Colombia: Central Bank holds the rate stable in March meeting

At its Board of Directors meeting held on 22 March, Colombia’s Central Bank (Banco de la República, BanRep) kept the benchmark interest rate at 4.25%, where it has been since 27 April 2018, when the Bank cut the rate by 25 basis points. The Bank’s latest decision was unanimous and in line with market expectations.

The Bank kept the rate stable against the backdrop of falling inflation, declining price expectations and healthy economic activity. Inflation dropped to an over four-year low of 3.0% in February (January: 3.2%), nearing the midpoint of the Bank’s 2.0%–4.0% target band, as the peso gained ground and amid reduced price pressures. Stronger domestic demand fueled a marked upturn in growth in 2018. The momentum should have carried over into this year and further reduce spare capacity, supported by an improved export performance and robust domestic demand dynamics.

The Bank’s accompanying statement signaled that it would maintain the current stance, offering little forward guidance beyond reiterating that the trajectory of inflation will be closely monitored in the context of global developments, including the evolution of oil prices, the Federal Reserve’s policy reversal and global trade tensions. While BanRep’s Governor, Juan José Echavarría, hinted at the Bank keeping the rate stable all year in a post-meeting press conference, the majority of panelists expect a rate hike by year-end as price pressures start to pick up.

Commenting on the meeting in the context of latest developments, JP Morgan economists noted:

“Notwithstanding the serenity of BanRep’s board, we keep our call for policy to move toward a more neutral stance starting in 4Q, taking the policy rate up 75bp to 5% by December. This call rests on: the constructive tone for growth, led by domestic demand; inflation which we expect to drift higher in 2H; the widening current account deficit; and lingering fiscal concerns, with the Fiscal Rule Committee considering some extra deficit space. We think these factors warrant a policy rate in neutral territory even if the Fed and global liquidity concerns are on the backburner.”

The next monetary policy meeting will be held on 26 April.

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