Monetary Policy in Colombia - World...
Transcript of Monetary Policy in Colombia - World...
Monetary Policy in Colombia
Trade offs and policy dilemmas
Jorge Toro
Head of the Economics Studies Department
Banco de la República, Colombia
Lima, June 16, 2008
Source: DANE, Banco de la República.
Annual Inflation - Headline (%)
3,03,54,04,55,05,56,06,57,07,58,0
May
-03
Aug
-03
Nov
-03
Feb-
04M
ay-0
4A
ug-0
4N
ov-0
4Fe
b-05
May
-05
Aug
-05
Nov
-05
Feb-
06M
ay-0
6A
ug-0
6N
ov-0
6Fe
b-07
May
-07
Aug
-07
Nov
-07
Feb-
08M
ay-0
8
By the last quarter of 2006 inflationary pressures started to show up. The inflation target was missed in 2007 and current inflation continues well above the target range.
Source: DANE, Banco de la República.
Most of inflationary pressures are explained by an increase in food prices, with contribution to total inflation in 2007 of
46%. Oil prices, has also put pressure on inflation
Regulated InflationAnnual %
0,02,04,06,08,0
10,012,014,016,018,0
may
-03
sep-
03
ene-
04
may
-04
sep-
04
ene-
05
may
-05
sep-
05
ene-
06
may
-06
sep-
06
ene-
07
may
-07
sep-
07
ene-
08
may
-08
Regulated Fuel and transport Remainder
Headline Inflation and Food Inflation (%)
6,39
9,73
4
6
8
10
12
May-02 May-03 May-04 May-05 May-06 May-07 May-08
Headline Food
Measures of core inflation
3,0
4,0
5,0
6,0
7,0
8,0
9,0
may
-03
ago-
03
nov-
03
feb-
04
may
-04
ago-
04
nov-
04
feb-
05
may
-05
ago-
05
nov-
05
feb-
06
may
-06
ago-
06
nov-
06
feb-
07
may
-07
ago-
07
nov-
07
feb-
08
may
-08
Core 20 Excluding food
Excluding: perishable foods, fuel and utilities Excluding food and regulated
Copy USA
Source: DANE and Banco de la República.
Nonetheless, there are more than supply shocks in the explanation of inflation. In fact, different measures of core inflation show an upward trend. Hence, excess demand
has also played an important role.
Inflation of tradable goods (excluding food and regulated) remains positive, hovering around 2%, despite the sharp appreciation of the peso (11.8% in the last 12 months).
Non-tradable goods inflation is stagnant above 5%Inflation Tradable and Non-Tradable
Excluding Food and Regulated (Annual %)
1,0
2,0
3,0
4,0
5,0
6,0
7,0
May
-04
Aug
-04
Nov
-04
Feb-
05
May
-05
Aug
-05
Nov
-05
Feb-
06
May
-06
Aug
-06
Nov
-06
Feb-
07
May
-07
Aug
-07
Nov
-07
Feb-
08
May
-08
Tradables Non-tradables
Source: DANE and Banco de la República.
Source: DANE, Banco de la República.
Difussion Indicator
0%10%
20%30%40%
50%60%
70%80%
Apr
-03
Jul-0
3
Oct
-03
Jan-
04
Apr
-04
Jul-0
4
Oct
-04
Jan-
05
Apr
-05
Jul-0
5
Oct
-05
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
The diffusion indicator, that is, the weighted percentage of items of the consumer’s basket whose annual inflation
is above the mid-point target range, reaches 70 percent
Inflation Expectations 12 Months Ahead
The rise in inflation an its diffusion to many goods, have increased inflation expectations and have reduced the
credibility on the inflation target
5,33
3,8
4
4,2
4,4
4,6
4,8
5
5,2
5,4
May
-05
Aug
-05
Nov
-05
Feb-
06
May
-06
Aug
-06
Nov
-06
Feb-
07
May
-07
Aug
-07
Nov
-07
Feb-
08
May
-08
Source: Banco de la República.
GDP vs Aggregate Demand
8,1
10
1
3
5
7
9
11
Mar
-04
Jun-
04
Sep-
04
Dec
-04
Mar
-05
Jun-
05
Sep-
05
Dec
-05
Mar
-06
Jun-
06
Sep-
06
Dec
-06
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Demand
GDP
Source: DANE, Banco de la República.
%
Inflation accelerated in a context of rapid economic growth, supported by a vigorous demand.
Source: DANE, Banco de la República.
Expansion of aggregate demand is explained by a strong investment and consumption growth, associated with a rise
of market confidence
Investment Growth (%)
15,8
28,2
-10
0
10
20
30
40
2000 2001 2002 2003 2004 2005 2006 2007
Private Public
Consumption Growth (%)
5,0
6,67,3
2,1
4,32,9
-2
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007
Private Public
In addition, favorable terms of trade induced a rapid exports growth
Source: DANE
Terms of Trade 1994 = 100
70
80
90
100
110
120
130
140
150
abr-
80
abr-
82
abr-
84
abr-
86
abr-
88
abr-
90
abr-
92
abr-
94
abr-
96
abr-
98
abr-
00
abr-
02
abr-
04
abr-
06
abr-
08
Exports Growth - Annual Variation (12 Months Cumulative)
-20%
-10%
0%
10%
20%
30%
40%
50%
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Dic
-06
Dic
-07
Strong demand resulted in an increasingly positive output gap, despite a rise of potential GDP. Output gap is currently estimated in a range of [2.0 - 2.5] percent.
GDP and Potential GDP
-6%
-4%
-2%
0%
2%
4%
6%
8%
Dic
-79
Dic
-81
Dic
-83
Dic
-85
Dic
-87
Dic
-89
Dic
-91
Dic
-93
Dic
-95
Dic
-97
Dic
-99
Dic
-01
Dic
-03
Dic
-05
Dic
-07
GDP Potential GDP
Output Gap
-6%-5%-4%-3%-2%-1%0%1%2%3%4%
Dic
-79
Dic
-81
Dic
-83
Dic
-85
Dic
-87
Dic
-89
Dic
-91
Dic
-93
Dic
-95
Dic
-97
Dic
-99
Dic
-01
Dic
-03
Dic
-05
Dic
-07
HPP
Source: Banco de la República.
Interbank rate and Central Bank Rate
5,0%
6,0%
7,0%
8,0%
9,0%
10,0%
May
-03
Nov-
03
May
-04
Nov-
04
May
-05
Nov-
05
May
-06
Nov-
06
May
-07
Nov-
07
May
-08
Interbank rate Repo-rate
In a context of rapid growth and inflationary pressures, the central bank decided in April 2006, to start a gradual raise of interest rates. From an initial level of 6%, interest rates
have been increased to 9.75%.
j3
Slide 12
j3 faltajechavso, 12/03/2007
The rise in the central bank rate was eventually reflected in higher of market rates and in a slowdown of credit growth
Credit Growth(Annual %)
-20%
0%
20%
40%
Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08Total Mortgage Consumption Commercial
Nominal Rates (%)
5
7
9
11
13
15
17
19
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
May
-07
May
-08
10
12
14
16
18
20
22
Deposit RateBanrep RateCredit Rate
At the same time, higher interest rates widened the interest rate differential. Nonetheless, portfolio flows were discouraged
by capital controls. Most capital inflows are FDI.
Central Bank Interest Rates
0
2
4
6
8
10
12
14
16
18
20
May
-99
Feb-
00
Nov
-00
Ago
-01
May
-02
Feb-
03
Nov
-03
Ago
-04
May
-05
Feb-
06
Nov
-06
Ago
-07
May
-08
FED RateBanrep Rate
Net Capital Flows - ColombiaMonthly Flows (US$ millions)
-500
-200
100
400
700
1000
1300
1600
Ene
06
Abr
06
Jul 0
6
Oct
06
Ene
07
Abr
07
Jul 0
7
Oct
07
Ene
08
Abr
08
FDIPortfolioTotal
Source : Banco de la República
Despite active intervention in the foreign exchange market, appreciation of the Colombian peso has turned
unstoppable.
Nominal Exchange Rate
LATAMLast Month Year to Date Year to Year Last 3 Years
Colombia -4,27% -15,52% -11,80% -27,24%Brasil -1,48% -7,86% -16,73% -32,93%
México -0,92% -4,79% -5,71% -4,28%Argentina -3,62% -3,10% -0,69% 6,03%
Perú 5,28% -2,84% -8,15% -10,42%Uruguay -2,43% -9,64% -18,14% -18,53%
Chile 6,43% -0,28% -6,32% -15,80%
Changes in Exchange Rates Against the US$
Ineffectiveness of Forex intervention was partly due to conflicting signals provided by a contractionary monetary
policy and an expansionary intervention policy. The weakening dollar added pressure on the peso.
-900
-600
-300
-
300
600
900
1,200
1,500
1,800
2,100
ene-
00ab
r-00
jul-0
0oc
t-00
ene-
01ab
r-01
jul-0
1oc
t-01
ene-
02ab
r-02
jul-0
2oc
t-02
ene-
03ab
r-03
jul-0
3oc
t-03
ene-
04ab
r-04
jul-0
4oc
t-04
ene-
05ab
r-05
jul-0
5oc
t-05
ene-
06ab
r-06
jul-0
6oc
t-06
ene-
07ab
r-07
jul-0
7oc
t-07
ene-
08ab
r-08
5
6
7
8
9
10
11
12
13
Intervención Neta Mensual sin GNC
Tasa Repo de Expansión Mensual Prom.
TIB Promedio Mensual Metodologia BR
Intervention in the Exchange Market Central Bank Rate and Interbank rate
Rapid economic growth and appreciation of the peso have resulted in an increasingly current account deficit.
Source: Banco de la República
( j )
-6
-5
-4
-3
-2
-1
0
1
2
319
92
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
e
Current Account as a Percentage of GDP
-3.7%
Despite a firm contractionary monetary policy, inflationary pressures remains strong
Core Inflation Indicators
3,0
3,5
4,0
4,5
5,0
5,5
6,0
May
-06
Jul-0
6
Sep-
06
Nov
-06
Ene-
07
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Ene-
08
Mar
-08
May
-08
Núcleo 20With Out FoodWith Out Perishable Food, Fuel and Public ServicesWith Out Food and EnergyCore USA
Source: Banco de la República
Headline Inflation and Food Inflation (%)
6,39
9,73
4
6
8
10
May
-06
Jul-0
6
Sep-
06
Nov
-06
Ene-
07
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Ene-
08
Mar
-08
May
-08
Headline Food
UC1
Slide 18
UC1 Dr. Toro, en esta gráfica usé los dos últimos años, en lugar del último año, porque en este último casi no se observa variación.Usuario Computacional, 06/12/2008
At the same time, there are clear symptoms of a recent slowdown of economic activity, while appreciation of
the peso is turning more acute
Uncertainty on the evolution of the world economy, and on its impact on emerging economies, makes particularly difficult at this juncture to assess the right direction of
monetary policy.
Commodities With Out Oil - Price Index
7090
110130150170190210
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Dic
-06
Dic
-07
Dic
-08
Dic
-09
Source: EIU
April Projections
International Risk Aversion
8
12
16
20
24
28
32
19/0
2/06
19/0
4/06
19/0
6/06
19/0
8/06
19/1
0/06
19/1
2/06
19/0
2/07
19/0
4/07
19/0
6/07
19/0
8/07
19/1
0/07
19/1
2/07
19/0
2/08
19/0
4/08
95
100
105
110
115
120
125
VIX JPY/USD
Source Bloomberg
In these circumstances, monetary authorities, both in Colombia, an in many other emerging economies, face challenging dilemmas:
1. Rising interest rates could exacerbate appreciation, but might also be required to tame inflationary pressures
2. Rising interest rates might be deemed indispensable to contain inflationary pressures, but entails the risk of inducing an excessive contraction of economic activity
The dilemma between relaxing or continue tightening could only be solved with more
information, as time goes by, but postponing necessary decisions could threaten economic
stability.
This is a hard time for policymakers