Thought July 31, 2020 / 07:28 pm UTC

Central Bank of Colombia Confirms Its Pessimistic Outlook

By Pedro Tuesta

As expected, Banco de la Republica (Banrep) announced a 25-bp rate cut to bring the overnight lending rate to 2.25%. More significantly, Banrep made significant changes to its forecasts, which are now in line with ours, confirming our view that Banrep will keep an expansive stance for a long time.

There was no surprise in the rate decision, which was unanimous. Furthermore, the communiqué did not provide any forward guidance. Banrep released in advance its forecasts for GDP and inflation, which will be part of next week’s quarterly monetary policy report. Banrep cut its 2020 GDP forecast range from a decline between 2% and 7% to a decline between 6% and 10%. The Bank also dropped the 2020 inflation forecast range from between 1% and 3% to between 1% and 2%, well below the 3% inflation target. 

The new forecasts give Banrep room to ease by at least another 25 bps to 2.00% without creating concerns about entering into negative real rates. Additionally, the larger output gap would allow the Bank to leave the overnight lending rate at 2.00% until Q3 2021 and then slowly bring it back toward 3.00% by the end of 2021, which would still be expansionary. We are not expecting a return to a neutral rate of 4.75% until 2024.

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Analyst Certification
I, Pedro Tuesta, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.