|Presentation (Only Available in Spanish)|
|Inflation Report December 2018 (Only Available in Spanish)|
|Video (Only Available in Spanish)|
In December 2018, inflation and all core inflation indicators fell close to the 3.0% target. Inflation expectations to one and more years are around 3.5%. The new economic activity figures for the last quarter of 2018 suggest that economic growth is still recovering from levels of output lower than the country's natural output level. The current monetary policy stance is slightly expansionary.
At the end of 2018, inflation surprised again by its fall, reaching 3.18% (Chart A), mainly due to the favorable behavior of the prices of tradable items and non-tradable items (excluding food and regulated items). Because of this, inflation excluding food and regulated items fell to 2.64%, and the average of core inflation indicators fell to 3.03%. Food prices continued to show an upward trend, with annual increases lower than 3.0%, while regulated prices rose well-above the target. In January 2019, analysts’ expectations to one and more years ranged between 3.3% and 3.5%, while those embedded in public debt bonds to two, three, and five years stood between 3.47% and 3.61%.
Inflation was low and close to 3.0% in the fourth quarter of 2018, in a context of a negative output gap with a relative recovery in domestic demand. Household consumption would have performed better due to the behavior of spending on durable goods. Investment would continue recovering, especially that directed to the purchase of machinery and equipment. The figures for foreign trade suggest that exports would have grown at a lower pace than imports. With this information, the Central Bank's technical staff considers that economic growth for the fourth quarter will stand around 2.7%, and for 2018, at 2.6%. Also for this year, the current account deficit as a share of GDP would stand around 3.7%.
At the end of 2018, the commercial loan portfolio (domestic and foreign currency, direct external credit, and bonds) grew 7.4% on a yearly basis; the one for consumption did so by 9.1%, and mortgages at 11.1%. The real interest rates for commercial, mortgage and consumer credits (except credit cards) are below the averages of the past ten years.
Vis-à-vis the previous Report, the technical staff reduced their forecasts for the international price of oil, growth of the country's trading partners, and external interest rates. Economic activity will continue recovering, and the excess of the country's spare capacity will reduce. Some transitory supply shocks can generate slight increases in inflation versus the target in the first half of 2019, but it will return to levels close to 3.0% in the second half of the year.
For 2019 the technical staff expects an average oil price of USD $63 per barrel (Brent), substantially less than the USD $73 per barrel mentioned in the previous report, as global production increased and world demand has slowed down slightly. Lower growth figures for production and the absence of inflationary pressures in advanced economies suggest smaller increases in policy interest rates, particularly in the United States. The country's risk premia and the value of the peso versus the US dollar were above the averages observed last year.
The technical staff at Banco de la República revised its growth forecast for the Colombian economy from 3.5% to 3.4%. The projected deterioration in terms of trade and the slight slowdown expected in the country’s trading partners would be partly offset by the positive effects of the Ley de Financiamiento mainly on investment. The acceleration of economic growth expected in 2019 implies a partial closure of the output gap and a likely widening of the current account deficit as a share of GDP.
Several shocks could raise inflation above our 3.0% target in the first half of the year: the 6.0% increase in the minimum wage in each of the past two years; a moderate El Niño that would raise food prices; and the prices of regulated goods, which have increased above 6.0% in recent years and could continue increasing at high rates in 2019. Nevertheless, these are transitory shocks, therefore inflation would return to levels close to 3.0% by the end of the year.
In all, economic activity is still recovering from a level that was lower than the country's natural output level. Inflation has lowered, but our forecast and the agents’ expectations still exceed 3.0%. External and domestic conditions suggest a gradual closing of the output gap in 2019. The current monetary policy stance is slightly expansionary.
Based on this information, in its December 2018 and January 2019 meetings, the Board considered the following factors its decision:
In this environment, assessing the situation of the economy and the risk balance, the Board deemed appropriate to maintain the policy interest rate at 4.25% (Graph B).
The Board will continue to carefully monitor the behavior of inflation and the forecasts for economic activity and inflation in the country, as well as the international context. Finally, the Board reiterates that monetary policy will depend on the new information available.
Juan José Echavarría
This was the presentation of the #InflationReport for the fourth quarter of 2018, held on Friday, February 15, by the Governor of Banco de la República, #JuanJoséEchavarría.