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Inflation Report September 2018 (Only Available in Spanish)
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Inflation Developments and Monetary Policy Decisions

In the  third  quarter  of  2018, inflation rose less  than  expected by analysts and the Central Bank’s technical staff, remaining close to the 3.0% target. Inflation  expectations to one and more years increased slightly, ranging between 3.3% and 3.5%. Economic growth in the third quarter is expected to be similar to that recorded in the first half of the year (2.6%), with a greater spare capacity than in 2017.
In September, the annual variation in the consumer price index (CPI) and the average of core inflation indicators  stood at 3.23% and 3.28%, respectively, relatively similar figures to those recorded in June (3.20% and 3.33%) (Graph A). Food  and regulated goods and services were the groups that  pushed inflation upwards,  while  tradable  and  non- tradable inflation excluding food and regulated items had a better performance than the average. Inflation expectations increased slightly, remaining somewhat above the target. Analysts’ expectations point  toward a 3.3% inflation rate  in  December 2018 and in 2019. Those extracted from public debt bonds to two, three, and five years stand around 3.5%.

The performance of inflation and inflation expectations in the third  quarter took place in a context of negative output  gap, with a somewhat more dynamic domestic demand than the one recorded in the first half of the year. The indicators  of retail sales, vehicle licenses, consumption credit, and imports of consumer goods suggest that  household  spending  would  have continued  to recover. On the other hand, imports of machinery and equipment in constant pesos would have accelerated slightly.

With the above, the Central Bank’s technical staff estimates that economic growth in the third quarter (seasonally and calendar adjusted)  would  be around  2.6%. This estimate  assumes that  the growth  in  public  consumption  would  continue  to moderate.  Also, that  investment  in civil works will  fall less than in the first  half of the year, with a similar performance (also negative) for buildings. Net exports would have subtracted to growth, with a greater expansion in imports than exports. The dynamics of absorption  would have taken place in an environment of recovery of the terms of trade and with a current account deficit that would have widened in US dollars and as a share of GDP. The latter suggests that the correction of the external imbalance would have been slower than had been forecast.

As for credit, in September, total indebtedness (portfolio in domestic and foreign  currency,  bonds, and external  direct  credit)  continued to decelerate, with a real annual growth rate of 2.5% for total credit, and -0.6% for commercial  credit.  The dynamics of household  debt has stabilized  around 6.0%. Real interest  rates—policy, commercial, mortgage, and consumer credit (except credit cards)—stand at levels below the averages of the past ten years.

For the remainder of the year, the new figures and forecasts of economic  activity  of  the  country’s  trading  partners  suggest that external demand will continue to increase, but at a somewhat slower rate than forecast one quarter ago. The futures market at a six and twelve-month  horizon suggests that the price of oil will decrease, but would remain at levels still  higher than those registered a year ago. Should this materialize, the terms of trade and the dynamics expected from the country’s trading partners could boost external revenues.

Several factors could put pressure on the exchange rate in the coming months. The Fed will  continue  to increase its interest  rates, and high volatility around the globe could increase the risk premia in emerging countries. A higher-than-expected reversal in international oil prices is not ruled out, and our current account deficit remains above 3.0% of GDP.

With all of the above, the technical staff of the Central Bank revised the growth forecast for this and the following year slightly downward. According to the new estimates, in 2018 and 2019, the increase in output would  be 2.6% (before: 2.7%), and 3.5% (before: 3.7%), respectively. These forecasts assume that  private  consumption  and investment will continue to recover, albeit with a slower dynamics than the one observed, on average, since 2005. The calculations also suggest that the excess of installed capacity would reduce in 2019.

The monetary policy actions taken so far and the excess of installed capacity should contribute  to the convergence of inflation to 3.0%. However, there are risks that could slow this process down. The devaluation of the exchange rate could be larger than expected, with a high impact  on the level  of prices of tradable  goods; regulatory changes could generate high increases in the prices of public utilities and regulated goods in the first half of 2019; finally, a greater impact on prices due to climatic variations is not ruled out.

Based on this information, in its meetings in September and October, the Board of Directors considered the following factors in its decision:

  • The  weakness  in   economic   activity   and uncertainty regarding its pace of recovery.
  • Observed    inflation    and     its     expected convergence to the 3.0% target.
  • The effects  from  the  changing international financial conditions on the Colombian economy.

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


Video of the Inflation Report 3Q-2018

This was the presentation of the #InflationReport for the third quarter of 2018, held on Thursday, November 15, by the Governor of Banco de la República, #JuanJoséEchavarría.


Thursday, 15 November 2018