The decision by the Colombian central bank to slow the pace of easing from 50bp to 25bp at last night’s meeting suggests that the rate-cutting cycle is approaching its conclusion. We remain comfortable with our forecast for two more 25bp cuts in the coming months, taking the policy rate to 2.00%.
- The decision by the Colombian central bank to slow the pace of easing from 50bp to 25bp at last night’s meeting suggests that the rate-cutting cycle is approaching its conclusion. We remain comfortable with our forecast for two more 25bp cuts in the coming months, taking the policy rate to 2.00%.
- We were among the majority that had expected the central bank to deliver a larger 50bp cut at yesterday’s meeting. In the event, after three successive 50bp reductions, the board decided to slow the pace of easing to 25bp. This decision suggests that, having cut rates by 175bp in this cycle so far, the board feels that finer tweaks in the policy rate are now more appropriate.
- That said, the tone of the statement accompanying the meeting was not substantially different from the previous one. It left the door open to further easing, saying that the balance of risks were in favour of “providing an additional boost to the economy”. It also provided no form of words to suggest that the easing cycle is approaching an end, nor any guidance as to the number of rate cuts that might be left in the cycle. It is also worth noting that two of the seven board members voted for a 50bp cut.
- For our part, we think additional easing is likely. Admittedly, headline inflation has probably bottomed out. Much of the recent drop in headline inflation has largely been due to a fall in fuel inflation (which is also included in some of the central bank’s core measures). The recent recovery in oil prices will reverse some of that downwards pressure.
- But inflation is likely to stay comfortably within the central bank’s 2-4% target range. (See Chart 1.) Moreover, the board is likely to remain focused primarily on the slow recovery in the economy (see Chart 2), which needs more support from monetary policy.
- Indeed, Colombia’s fiscal policy response has been relatively weak, which puts the burden on the central bank to act. The weakness of the fiscal response reflects the government’s concerns about the health of the public finances, with the debt ratio likely to jump to around 60% of GDP this year (and remain above this level over the coming years). (See here).
- All told, we think that the Colombian central bank will cut the policy rate by 25bp at its next meeting, to 2.25%. Further out, and absent disorderly movements in the peso, we think there is scope for the central bank to cut the policy rate by another 50bp to 2.00%. (See Chart 2 again.) Judging by the swap markets, investors appear to have caught up to our more dovish view over the past couple months. But if anything, the risks are skewed towards further easing.
Chart 1: Colombia Consumer Prices & Policy Rate (%)
Chart 2: CE Colombia Covid Recovery Tracker (% diff from Jan-Feb. median, 7-day moving avg.)
Sources: Refinitiv, Capital Economics
Quinn Markwith, Latin American Economist, email@example.com