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Inflationary pressures likely to
ease as peso strengthens
The failure of the nationwide referendum did not translate into a massive
sell-off of Colombian assets. In fact, the currency appreciated 0.7% in
nominal terms in October, a strengthening from the 1.5% depreciation
observed in the prior month. As a result, the currency closed the month at
2,870 pesos to the US$, virtually unchanged compared to the end of last
year. Furthermore, the stock market gained 2.7% in October, while spreads
to comparable US Treasuries on Colombia’s J.P. Morgan EMBI+ benchmark
sovereign bond actually narrowed by 20 basis points. The stability of the
Colombian currency this year has helped to reduce inflation notably. In
October, consumer prices rose just 0.06%, which was down from the 0.22%
increase registered in the prior month. As a result, the annual inflation
rate dropped from 7.1% in September to 6.6% in October. Similarly,
producer prices rose only 0.16%, up slightly from the 0.03% drop observed
in the prior month. The October producer price figure brought down the
annual rate to 5.3% from 6.8% in September – now well below the consumer
price figure. Monetary officials are optimistic that the current downward
trend for inflation will persists through the end of the year, which will
help authorities comply with this year’s 5%-6% inflation target.
Panellists, however, are less enthusiastic and expect year-end inflation
to reach 6.6%, which is a 0.1 percentage point down from last month. The
acceleration of economic growth next year is likely to exert upward
pressure on consumer prices. In fact, Consensus participants see annual
inflation at 5.9%, which remains well above the Central Bank’s 3.5% to
5.5% target range.
Central Bank keep monetary reins
loose
In October, the Central Bank raised the benchmark DTF interest rate by 7
basis points to 7.84%. The recent downward trend in inflation and exchange
rate stability are likely to encourage monetary authorities to maintain a
loose monetary policy stance. So far this year, interest rates have been
at historical lows, as the Central Bank has preferred using exchange rate
policy via foreign exchange market intervention rather than monetary
policy tools to keep inflation at bay. Both monetary authorities and
government officials appear to agree that interest rates should remain low
to encourage the current economic rebound. Nevertheless, Consensus
Forecast panellists see Central Bank officials tightening monetary reins
by the end of the year, with the DTF interest rate anticipated to rise to
8.2%, which is down 0.3 percentage points from last month’s forecast.
Despite the economic pick up the pace next year, inflation is expected to
moderate further. Nevertheless, Consensus participants expect further
monetary tightening, with the DTF rate seen to rise to 8.8%.
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