Download Monetary Policy in Colombia

Monetary Policy in Colombia
Hernando Vargas
Banco de la República
April 2005
I.
Monetary Policy Strategy
II.
Recent Trends in the Economy
III. Monetary and Exchange Rate Policies
IV. Is Inflation picking up?
V.
Is there an Asset Price Bubble?
I. Monetary Policy Strategy
• Inflation Targeting since 1999….
• …. with strong FX intervention since
2004
II. Recent Trends in the Economy
International conditions have favored
growth and currency appreciation
• Terms of trade (Oil, Coal, Coffee etc)
• External Demand for “non-traditional”
exports (Venezuela and the U.S.)
• Workers´ remittances
• Low external interest rates and sovereign
spreads
• High FDI
Internal conditions have favored growth
of output and aggregate demand
• Low domestic interest rates
• Improved balance sheets of the financial
system, households and firms
• Growing business and consumer
confidence
• Increasing productivity? (imports of capital
goods and foreign competition)
Results: High growth rates of
output and aggregate demand
Internal Demand and GDP
(Real annual Growth)
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Internal Demand
2000
Source: DANE
2001
2002
GDP
2003
2004
2005
Results: Negative output gap
possibly closing….
Output Gap
(% Potential Output)
4.0%
2.0%
0.0%
-2.0%
-4.0%
2005 T1
2004 T1
2003 T1
2002 T1
2001 T1
2000 T1
1999 T1
1998 T1
1997 T1
1996 T1
1995 T1
-6.0%
-8.0%
…. Although there is great uncertainty regarding the measures of output gap
Results: Strong nominal and real
currency appreciation
Real Exchange Rate Index -RERI(1994 = 100)
Nominal Exchange Rate
3000
150
140
130
120
2800
2600
110
100
90
80
2400
RERI based on PPI
RERI based on CPI
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Mar-06
Nov-05
Jul-05
Mar-05
Nov-04
Jul-04
Mar-04
Nov-03
Jul-03
Mar-03
Nov-02
Jul-02
Mar-02
Nov-01
Jul-01
Mar-01
Nov-00
Jul-00
Mar-00
1800
Sep-00
2000
Mar-00
2200
Results: Decreasing inflation on
target
Annual Consumer Inflation and Inflation Targets
10.5
9.5
8.5
7.5
6.5
5.5
4.5
Mar-00
Jun-00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
3.5
Inflation Target
Annual Consumer Inflation
Source: Banco de la República, DANE
Annual Non-Food Inflation
III. Monetary and Exchange Rate
Policies
Low short term interest rates and large CB
intervention in the FX market (especially since 2004)
Foreign Exchange Intervention and
Monetary policy repo - rate
%
1,200
13.0
12.0
900
11.0
10.0
600
9.0
300
8.0
7.0
6.0
Monthly net fx purchases
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
5.0
Jan-00
-300
Monetary policy repo rate
So far, the signals coming from interest rate policy and FX intervention
have been consistent
Some features of FX intervention
• Discretionary intervention since september 2004
(before: “rules-based” auctions of options)
• No time-frame or amounts are announced
• No specific level of the exchange rate has been
targeted
• Sterilization – CB has “defended” the short run interest
rate:
–
–
–
–
OMOs
Reductions in REPO loans to banks
Government deposits in the CB
Sales of international reserves to the Government
The FX exposure of the Government has
been reduced…
COLOMBIA - BALANCE OF PAYMENTS
Current account (US$ Mill)
Current account as % GDP
Private sector - Capital and financial account (excludes FDI) (US$ Mill)
FDI (US$ Mill)
Public Sector - Capital and financial account (US$ Mill)
Change in gross international reserves
2003 pr 2004 pr
-974.3 -938.4
-1.2
-1.0
-494.8
254.0
820.0 2,974.6
378.0
-36.1
-183.8 2,541.1
Sells of international reserves to Central Government
p: preliminary
GROSS DEBT
Source: Banco de la República CENTRAL GOVERNMENT
1990-2005
0.0
2005 pr
-1,930.4
-1.6
495.3
5,568.8
-2,729.8
1,728.7
500.0 3,250.0
60.0
50.0
% PIB
40.0
30.0
20.0
10.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
4.2
3.5
5.8
5.7
5.1
6.2
7.1
9.3
11.1
16.7
22.2
24.9
29.0
28.6
29.0
33.0
Foreign
12.7
11.7
10.8
8.9
7.2
7.4
7.2
8.6
11.2
14.9
18.3
22.1
25.4
24.8
20.7
16.8
Total
16.9
15.2
16.6
14.6
12.3
13.7
14.4
17.9
22.2
31.6
40.4
47.0
54.4
53.5
49.7
49.8
Domestic
…But market risk has increased in
the financial system
(greater reliance on the domestic market)
Investments as a percentage of total assets
Credit Institutions
Public debt holdings (TES) of Pension Funds
(%)
37%
50%
32%
37.27%
40%
27%
30.99%
30%
20%
23.20%
22%
23.36%
17%
16.12%
12%
10%
Peso-denominated foreign debt: Attractive but limited option
Greater fiscal adjustment + better market risk regulation?
Feb-06
Feb-05
Feb-04
Feb-03
2005
Feb-02
2004
Feb-01
2003
Feb-00
2002
Feb-99
2001
Feb-98
0%
Feb-97
7%
Why has the CB maintained low
interest rates?
IT: Conditional inflation forecasts on target:
– Negative output gap
– Currency appreciation
– Inflation expectations close to targets
Why has the CB intervened in the
FX market?
• Initially, to restore the level of international
reserves after the 2002-2003 episode
• Later, to protect the “tradable” sectors of the
economy from what seemed to be a temporary
appreciation:
– TOT and external demand reversal (Oil and
Venezuela)
– Fall in the future volume of oil exported (reserves
depletion)
– 2006: Electoral year
However, appreciation has lasted
longer than expected…
• TOT did not fall. In particular, high oil prices
have:
– Increased the value of exports
– Kept high growth rates in Venezuela and Ecuador
– Attracted FDI
• External interest rates and spreads
unexpectedly low for an unexpected longer
period
• Strong coal exports and FDI
• Purchases of Colombian corporations by foreign
investors …. Confidence?
Has the FX intervention been
effective?
Nominal Exchange Rate (Index)
(January 2005=100)
• The Col peso has
appreciated…
CHILE
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
COLOMBIA
BRASIL
Source: Datastream
Embi + (Index)
(January 2005=100)
130
110
90
70
50
Colombia
Source: Bloomberg
Brazil
Chile
Apr-06
Mar-06
Feb-06
Jan-06
Dec-05
Nov-05
Oct-05
Sep-05
Aug-05
Jul-05
Jun-05
May-05
Apr-05
Mar-05
Feb-05
30
Jan-05
• …but less and with
lower volatility than
other regional
currencies since
2005, despite of a
larger fall in the
Colombian
“spreads”….
109
104
99
94
89
84
79
74
• However, it is difficult to extract clear
conclusions about the effectiveness of
intervention:
– Counterfactual?
– International comparisons require to control for other
effects
• If appreciation persists, there might be conflicts
between FX intervention and the inflation target,
especially if the output gap turns positive at a
fast rate:
– Reduction of the credibility of the IT or the
effectiveness of FX intervention
– Nevertheless, there is ample scope for sterilization:
• CB profits > 0
• Small interest rate differential
IV. Is Inflation picking up?
External conditions in 2006-2007 still favor
aggregate demand growth and appreciation
(or a small depreciation at best)
• High TOT in 2006 and no strong reversal in
2007
• High growth rates of trading partners
• No strong reversal in capital flows
• Possibly large FDI inflows (mining)
….Although this scenario is subject to great
uncertainty, especially regarding capital flows
On the basis of this scenario we forecast a
reduction of inflation in 2006 and a rise in
2007…
Inflation Forecast
(%)
(%)
7.0
7.0
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2003 Q4
2004 Q4
2005 Q4
2006 Q4
2007 Q4
• 2006: Appreciation, decline in growth of food prices and
some regulated prices
• 2007: Negative output gap closes, pressures on nontradable goods prices and on some regulated prices
Inflation Forecast
(%)
(%)
7.0
7.0
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
Dec-05 Mar-06
Jun-06
Headline
Sep-06
Dec-06 Mar-07
Non-Food
Jun-07
Sep-07
Food
Dec-07
• The low initial level of real interest rates and the
closure of the output gap (pressure on nontradable goods prices) will require increases in
the interest rates in the future…
• … However, the timing and the size of such
moves will depend on the behavior of the
economy. In particular, there is uncertainty on:
– The importance of the (one time effect?) increases in
productivity and competition. F. ex. many nontradable sectors still show low or decreasing rates of
inflation (expectations or productivity/competition?)
– The evolution of the exchange rate: A faster reversal
of the spreads or capital flows will probably require
faster and larger increases of the interest rates
V. Is there an Asset Price Bubble?
….No or not a relevant one
• Two key macroeconomic variables:
2003
2004
2005
2006
Current Account
Balance (% GDP)*
-1.2%
-1.0%
-1.6%
-1.6%
Real Fin. System
Credit Growth**
1.2%
1.7%
4.5%
10.0%
* 2006: Projection
* Gross local currency loans. Average for the year. 2006: First quarter.
Source: Banco de la República
• …do not show signs of large macro imbalances so far
• Three key asset prices: Real Estate, Stocks, Public Bonds
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Bogotá
90
85
80
75
december/98=100
Real Estate: Not at this point…
Real Price of New Homes Sold
100
95
Real Estate: Not at this point…
Price-Rent ratio for the Housing Market
(New Houses)
(Average 1994-2005 = 100)
130
125
120
115
110
105
100
95
90
85
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
80
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
Mar-82
Real Estate: Not at this point…
Relative Price of Housing
190
170
150
130
110
90
70
50
0.0
Ene-03
Feb-03
Mar-03
Abr-03
May-03
Jun-03
Jul-03
Ago-03
Sep-03
Oct-03
Nov-03
Dic-03
Ene-04
Feb-04
Mar-04
Abr-04
May-04
Jun-04
Jul-04
Ago-04
Sep-04
Oct-04
Nov-04
Dic-04
Ene-05
Feb-05
Mar-05
Abr-05
May-05
Jun-05
Jul-05
Ago-05
Sep-05
Oct-05
Nov-05
Dic-05
Ene-06
Feb-06
Mar-06
Real Estate: Not at this point…
Adjusted Mortgage Loans of the Financial System
Annual Grow th (Monthly average of w eekly data)
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Cartera bruta
Real Estate: …but this market must
be closely monitored
• Housing is an important
component of
households´ assets and
mortgage credit may
become again significant
in households´ debt
Mortgage loans share of household credit
80%
70%
60%
50%
40%
200509
200502
200407
200312
200305
200210
200203
200108
200101
200006
199911
199904
199809
199802
199707
199612
199605
199510
199503
199408
20%
199401
• Recently, banks have
reduced significantly the
mortgage interest rates
30%
Jul-02
Sep-02
Nov-02
Ene-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Ene-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Ene-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Ene-06
Mar-06
150
130
90
70
50
10
140
120
100
80
60
40
30
20
0
Annual Growth (%)
Colombia Stock-Exchange General Index
Jul-02
Sep-02
Nov-02
Ene-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Ene-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Ene-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Ene-06
Mar-06
110
Annual Growth (%)
Stocks: Large price inceases related,
among other things, to foreign purchases of
colombian companies
Colombia Stock-Exchange General Index
US Dollars
180
160
Stocks: There may be a “bubble”
component…, but it is not macroeconomically
important
• Stocks represent less than 5% of
household´s portfolios,
• … less than 15% of pension funds
portfolios,
• … and less than 5% of bank´s portfolios
However, it might be an important indicator of
portfolio shifts
Domestic Public Bonds: Market risk is
a concern, but prices are mostly related to
external factors
10-yearTES Yield vs. EMBI Colombia
10-yearTES Yield vs. 10-year US Treasuries Yield
18.0
6.0
16.0
18.0
800
16.0
700
5.0
14.0
14.0
12.0
4.0
600
12.0
500
10.0
3.0
8.0
10.0
400
8.0
10-year TES Yield
10-year US Treasuries Yield
10-year TES Yield
EMBI Colombia
02-Mar-06
02-Jan-06
02-Nov-05
02-Sep-05
02-Jul-05
02-Mar-05
02-May-05
02-Jan-05
02-Nov-04
02-Jul-04
02-Sep-04
02-May-04
0
02-Jan-04
02-Mar-04
2-Mar-06
2-Jan-06
2-Nov-05
2-Sep-05
2-Jul-05
2-Mar-05
2-May-05
2-Jan-05
2-Nov-04
2-Sep-04
2-Jul-04
2-May-04
2-Jan-04
2-Mar-04
2-Nov-03
2-Sep-03
2-Jul-03
2-Mar-03
2-May-03
2-Jan-03
0.0
100
02-Nov-03
-
2.0
02-Sep-03
2.0
200
4.0
02-Jul-03
1.0
02-May-03
4.0
300
6.0
02-Mar-03
2.0
02-Jan-03
6.0
END
Workers´ Remittances
COLOMBIA: WORKERS REMITTANCES
1994-2005
3500
3,314
3,170
3,060
3000
2,454
USD Millions
2500
2,021
2000
1,578
1500
1,297
1000
788
500
0
1998
1999
2000
2001
2002
2003
Source: Balance of Payments- Banco de la República
Workers Remittances
◄
2004
2005
High FDI (Gross)
FOREIGN DIRECT INVESTMENT FLOWS
(millions of dollars)
2003 pr
2004 pr
FOREIGN DIRECT INVESTMENT FLOWS
1,758
3,117
Mining (petroleum, coal and others)
905
1,775
Privatizations and private firms sales
23
Other sectors
852
1,320
pr: preliminary
Source: Banco de la República
◄
2005 pr
10,192
3,219
5,032
1,941
Low domestic interest rates
Real 90-days Interest Rate
(interest rate for fixed-term deposits)
6,0
5,0
4,0
%
3,0
2,0
1,0
0,0
Mar-00
Jun-00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
-1,0
Real Interest Rate
◄
Average (since 1986)
Improvement of balance sheets of the financial
system, households and firms
Private Corporate Sector
Debt/Equity
35%
30%
25%
Capital Adequacy Ratio
Credit Institutions
20%
15%
17%
10%
5%
16%
0%
15%
2000
2001
2002
2003
2004
14%
13%
Households
Financial Debt/Financial Assets
12%
11%
70%
30%
20%
10%
0%
1996
1997
1998
1999
2000
2001
2002
2003
◄
Feb-06
Jun-05
Oct-04
Feb-04
Jun-03
Oct-02
Feb-02
Jun-01
Oct-00
Feb-00
Jun-99
Oct-98
Feb-98
40%
Jun-97
Feb-96
50%
Oct-96
10%
60%
Source: Fedesarrollo and Banco de la República
Source: Fedesarrollo
◄
20
30
Feb-06
Nov-05
Aug-05
-10
May-05
10
Feb-05
Nov-04
Aug-04
May-04
Feb-04
Nov-03
Aug-03
May-03
Manufacturing Cofidence Indicator
Feb-03
Nov-02
Aug-02
May-02
-30
Feb-02
-20
Nov-01
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Growing business and consumer
confidence
(Trend component)
Consumer Confidence
(Index)
40
25.1
10
20
0
13.9
0
-10
-20
-30
Increasing productivity?
Imports of Capital Goods
US$ Millions
8500
8000
(Last 12 Months)
Imports
Annual Growth
Growth
50%
7500
40%
30%
7000
20%
6500
6000
10%
5500
0%
5000
-10%
4500
-20%
4000
-30%
3000
-40%
May-98
Sep-98
Jan-99
May-99
Sep-99
Jan-00
May-00
Sep-00
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
3500
Source: DANE
◄
Inflation expectations close to
targets
Annual Inflation Expectations
Banks and Brokers
Annual Inflation Expectations
Banks and Brokers
(Expectation made in month i for december of the same year)
(Expectation made in month i for month i one year ahead)
7.0%
6.5%
6.5%
6.0%
6.0%
5.5%
5.5%
5.0%
◄
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
Jan-05
Nov-04
Sep-04
Jul-04
May-04
Mar-04
Jan-04
Nov-03
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
Jan-05
Nov-04
Sep-04
Jul-04
May-04
Mar-04
4.0%
Jan-04
4.0%
Nov-03
4.5%
Sep-03
4.5%
Sep-03
5.0%