Monetary Easing Cycle To Continue In H113
BMI View: We believ e that below-target inflation, slow ing domestic demand, and a strong currency will increase the Colombian central bank's dovishness over the coming months. We are therefore revising our end-2013 policy rate forecast from 4.00% to 3.50%, implying 50 basis points worth of cuts , which we expect will come in the first half of the year.
After cutting the policy rate from 5.25% in June 2012 to 4.0% in January, we believe that Colombian Banco Central de la Repúbl ica (BanRep)'s monetary easing cycle will continue over the coming months. Indeed, despite the recent rate cuts, inflation has r emained in a steady downtrend, coming in at 2.0% y ear -o n -y ear (y-o-y) in January, hitting the lower end of BanRep's 3.0% (+/-1) target range . We are therefore revising down our end-2013 policy rate forecast from 4.00% to 3.50%, as we believe BanRep officials will seek 50 basis points (bps) worth of cuts in the first half of the year to stimulate domestic demand and bolster export competitiveness .
|More Cuts In An Environment Of Declining Inflation|
|Colombia - Consumer Price Inflation And Policy Rate|
Declining Inflation Expectations Will Drive BanRep's Dovish Stance
There are strong indications that BanRep's dovishness has increased in recent monetary policy meetings, which we believe will pave the way for further cuts over the coming months. Indeed, t he minutes from January's meeting reveal that end-year inflation expectations continue to head lower, and are now slightly below BanRep's 3.0% inflation target . Moreover , more than one BanRep member voted for a 50bps cut in January, as opposed to the 25bps cut implemented, suggesting looser monetary policy is ahead . Additionally, BanRep officials have expressed concern over a weakening in gross fixed capital formation, which contracted by 4.6% y-o-y in Q312. While the contraction is mostly due to a temporary slowdown in public works construction, we believe BanRep authorities will seek to reduce financing costs through rate cuts to ensure a strong recovery in investment. Finally, credit growth continues to slow , presaging a further moderation in private consumption - which will also prompt BanRep officials to seek looser monetary policy.
Export Competitiveness On BanRep's Mind
Moreover, we believe BanRep is increasingly concerned with the pesos's strength, and will seek c uts to reduce the unit ' s carry appeal, in an effort to stem appreciatory pressures. A strong peso, averaging COP1,796/US$ in 2012, compared to its C OP1,930/US$ five-year average, has weighed heavily on the country's export competitiveness. Indeed, the most recent data suggests exports grew by only 3.2% y-o-y in November 2012, down from 40.4% in November 2011. This has also been reflected in weak industrial production, which contracted by 4.1% y-o-y in November 2012, its largest contraction since 2009. While BanRep increased its FX purchasing programme from a minimum of US$20mn p er day to US$30mn in February to weaken the peso, the unit remains strong, trading at COP1,786/US$ as of February 15. We believe that strong appetite for Colombian assets and robust foreign investment will continue to add appreciatory pressures on the peso, and create greater incentives for BanRep officials to extend their monetary easing cycle over the coming months.
|Peso Strength Will Continue To Weigh On Exports|
|Colombia - Exports And Industrial Production|
Risks To Outlook
There are se veral factors which pose significant downside risks to our policy rate outlook. First, if price pressures continue to head lower, particularly on the back of a stron g peso, BanRep authorities will likely seek more than 50bps worth of cuts thi s year. Moreover, if the peso remains stronger than the psychologically important COP1,800/US$ level for an extended period, continuing to weigh on export competitiveness, BanRep authorities will likely seek a more aggressive monetary easing cycle than we currently anticipate.