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.