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Colombia: Inflation expectations continue to trend lower. The consensus projects a rate cut by the BanRep this month

 

April 16, 2018 (Investorideas.com Newswire) According to the latest BanRep survey, the market consensus expects inflation to stand at 3.27% by year-end, 8bp below the figure observed the previous month and 20bp lower than Jan-18 (see table 1). This is consistent with the sizable surprise in the Mar-18 figure, which came in at 0.24% m/m vs. 0.38% expected by the consensus according to the previous survey. Longer-term inflation projections fell slightly with both 12-month- and 2-year-ahead expectations decreasing by 1bp to 3.28% and 3.26%, respectively. Overall, this is in line with our long-held view of a gradual reduction of inflation expectations in tandem with lower observed inflation.

In our view, growing slack capacity in the economy is and will continue to be the main driving force behind the convergence of core and headline inflation towards the targets of the BanRep. Recall that this will be the first year since the oil shock in which the wider output gap will have a clear effect on headline inflation, as in previous years both external and internal shocks curtailed the potential impact of weak domestic demand on prices (e.g. historically-high FX rate, El Niño phenomenon, truckers strike, and VAT hike). Thus, we maintain our 2.9% estimate for year-end.

Economists forecast an inflation of 0.29% m/m in Apr-18, similar to our estimate (0.28%). We highlight that annual inflation would reach 2.94% should our forecast materialize. The figure would be mainly explained by an acceleration of foodstuffs, as seen in the wholesale prices we monitor.

As for the monetary policy, the market consensus expects the BanRep to cut its reference rate to 4.25% in the Apr-18 meeting, also in line with our view. Currently, analysts think that this rate level will be maintained during the next twelve months. The view of further easing seems to be backed by some Board members, as Echavarría, Cárdenas, and Ocampo all remarked recently on the positive behavior of inflation in Mar-18, while Cárdenas specifically mentioned that there is room for further cuts in the reference rate. Even, Cárdenas recently mentioned that he is considering the possibility of voting for a 50bp cut the next meeting.

Finally, economists kept the 2018 GDP growth projection at 2.4% (Credicorp Capital: 2.3%) while setting a 3.0% forecast for 2019 (we have 2.8%). Moreover, they now foresee the FX standing at COP 2,883 by Dec-18 vs COP 2,948 previously, now below our current estimate of COP 2.900.

For charts, tables and the full report, see the pdf file

Daniel Velandia, CFA
+ (571) 3394400 ext. 1505
dvelandia@credicorpcapital.com

Camilo Durán
+ (571) 3394400 ext. 1383
caduran@credicorpcapital.com


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