20171013-法国巴黎银行-Colombia_s_rates__To_cut_or_not_to_cut__7页_488kb

Summary of "Colombia's rates: To cut or not to cut?"

Core Content

This document analyzes the current economic and monetary policy landscape in Colombia, focusing on the central bank's (BanRep) potential decisions regarding interest rate cuts in 2017 and 2018. It provides insights into the country's macroeconomic imbalances, GDP growth trajectory, and inflation expectations, which are key factors influencing the Bank of Colombia's stance on monetary policy.

Main Views and Key Information

1. Current Economic Imbalances

• "Twin" Deficits: The current account and fiscal deficit are expected to remain significant throughout 2017, with the twin deficit finishing the year around 7.5%.
• Current Account Deficit: At 3.7% in Q2, the deficit is forecast to narrow slightly to 3.5% by year-end, but it still exceeds sustainable levels by more than 1 percentage point.
• Fiscal Deficit: The government is unlikely to meet the 3.5% fiscal target, with a projected deficit of 4% for the year. This is due to ongoing public investment and obligations related to the infrastructure and peace agreement programs.

2. GDP Growth and Output Gap

• Output Gap: Colombia has a substantial output gap, indicating significant unused capacity in the economy.
• GDP Growth:
  • In 2017, GDP growth is expected to be 1.5% year-on-year.
  • By the end of 2018, growth is projected to accelerate to 2.5%.
  • The output gap is estimated to remain above potential, which is in the range of 3% to 4%.

3. Monetary Policy Outlook

• BanRep's Stance: The central bank has opted to maintain a cautious tone in its policy decisions, particularly in the second half of 2017.
• Rate Cuts in 2018: The authors suggest that more ambitious rate cuts are likely in 2018, with the central bank potentially reducing rates to 4.0% by December 2018.
• Inflation Expectations: Core inflation is expected to remain tame, and CPI is projected to fall by 1.5 percentage points from 2016 levels, supporting the case for monetary easing.

4. Key Factors Influencing Policy Decisions

• Consumption Downturn: The lagged effects of the consumption slowdown are expected to keep inflation in check.
• Indexation Forces: Tamer indexation forces contribute to lower inflationary pressures.
• BanRep's Assessment: The central bank may perceive GDP growth as underperforming relative to its potential, which could justify further monetary stimulus.

Supporting Evidence

• Chart 1: Highlights the trade balance and oil price trends, indicating no significant improvement in the near term.
• Chart 2: Shows the output gap and GDP growth, reinforcing the view that there is room for monetary easing without triggering inflation.

Conclusion

The authors advocate for a wait-and-see approach in 2017, given the current economic imbalances and weak growth. However, they believe that 2018 will present a more favorable environment for rate cuts, driven by the large output gap and subdued inflation expectations.

Legal and Regulatory Notice

• The document is non-independent research and is considered a marketing communication under MiFID.
• It is not intended for retail investors and is only for professional clients and eligible counterparties.
• The information is based on public sources and is subject to change.
• BNP Paribas may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
• Performance data may be based on back-testing and is not guaranteed.
• No investment, financial, legal, or tax advice is provided in this document.

Disclaimer

• The document is not a prospectus or investment offer.
• Securities discussed may not be eligible for sale in all jurisdictions.
• Indicative prices are based on internal models and may not reflect actual market conditions.
• No liability is accepted for any use or reliance on the document's content.