Economic Analysis - Easing Cycle To Continue In 2018 - MAR 2018


BMI View: Decelerating inflation and moderate economic growth will prompt Colombia ' s BanRep to continue its monetary easing cycle in 2018. A change to the bank's meeting schedule may also provide greater monetary policy predictability this year.

Colombia's Banco de la Republica (BanRep) will continue its easing cycle in 2018, in line with the recent trend. The bank proved more dovish than we expected in Q417, cutting the benchmark rate by 25bps in both October and November, bringing the policy rate to 4.75% by end-2017 and capping off a cumulative 275bps of cuts in 2017. While we had initially expected the bank to stand pat in Q417, our view that further easing was on the cards remained in play ( see ' BanRep To Hold Through End-2017, Additional Cuts To Come In 2018', November 3 2017). Given the bank's dovishness in recent months and our expectations that disinflation will persist and growth will pick up only moderately, we have revised down our end-2018 policy rate forecast to 4.25%, from 4.50% previously. This forecast is broadly in line with Bloomberg consensus estimates and interest rate swap markets.

BMI Inflation & Policy Rate Forecasts
Indicator 2016 2017e 2018f 2019f
e/f = BMI estimate/forecast. Source: BanRep, Bloomberg, BMI
Consumer price inflation, % y-o-y, eop 5.7 4.0 3.8 3.3
Consumer price inflation, % y-o-y, ave 7.5 4.3 3.4 3.5
Central bank policy rate, % eop 7.50 4.75 4.25 5.00

While headline inflation accelerated in year-on-year terms in October and November, we expect that disinflation will persist in 2018. The combination of substantial exchange rate weakness and an acceleration in food price pressures that drove headline inflation well above BanRep's 3.0% +- 1.0% target band in the past two years is unlikely to be repeated in 2018. We maintain our average inflation forecast for the year at 3.4% y-o-y, down from an estimated 4.3% y-o-y for 2017.

Heading Back Towards Target
Colombia - Consumer Price Inflation, Select Components, Inflation Target, % y-o-y
Source: BanRep, BMI

In addition, Colombian growth will accelerate only moderately over the next several quarters, prompting the bank to maintain an accommodative monetary policy stance. Economic activity growth decelerated in August and September before picking up again in October, suggesting that the economy remains fragile. We maintain our view that real GDP growth will pick up in 2018, bolstered by a recovery in consumption and an uptick in investment related to the 4G transport programme ( see ' Growth Will Bottom In 2017 As Headwinds Ease ' , October 4 2017). However, at only 2.6% growth will remain weak by historical standards in 2018, below the five-year average of 3.2%. Should political uncertainty related to legislative elections in March and a presidential election in May undermine growth to a greater extent than we expect this year, this would prompt us to revisit our monetary policy outlook in light of increased downside risks.

Rocky Road For Economy
Colombia - Economic Activity, % y-o-y 3mma
Source: BanRep, Bloomberg, BMI

Change To Meeting Schedule May Bring More Policy Certainty

BanRep's November announcement that it would meet 12 times in 2018, but reduce the number of rate setting meetings from 12 to eight, may increase the predictability of rate decisions. While BanRep stated that it retains the ability to set policy at all 12 meetings, the change aims to increase the information and time available for analysis, and is in line with international best practices. With BanRep having a reputation for surprising analysts and investors over the course of the last few years, we believe the change may boost the predictability of policy direction over the course of the year.

2017 & 2018 Monetary Policy Meetings
2017 Rate Decision 2018 Rate Setting Meetings
Source: BanRep, Bloomberg, BMI
January x
February -25bps
March -25bps x
April -50bps x
May -25bps
June -50bps x
July -25bps x
August -25bps
September x
October -25bps x
November -25bps x
December