monetary policy and external shocks: colombia ciii meeting, cemla€¦ · (index jan 2012=100)...

Monetary policy and external shocks: Colombia

CIII Meeting, CEMLA

Juan José Echavarría Governor, Central Bank

Monetary Policy Responses to external shocks

• Initial conditions• Shocks• Impact and channels• Considerations on policy responses

• Nature of shocks• The exchange rate as shock absorber• Monetary policy

• Policy responses

• Oil exports represented more than 50% of total exports

• Non commodity exports to oil dependent trading partners larger than 25%

• FDI in the oil sector represented more than 35% of total FDI

• Oil related revenues represented 17% of total public revenues in 2012-2014

$10,101

33%

0%

10%

20%

30%

40%

50%

60%

0

5000

10000

15000

20000

25000

30000

35000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Crude Oil and Petroleum Products Exports

Crude Oil and Petroleum Products Exports (USD millions, F.O.B)

Percentage of Total Exports (right axis)

Source: DANE Source: Banco de la República

• The Colombian economy, highly oil dependent:

$13,593

16%

0%

10%

20%

30%

40%

50%

60%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

FDI in the Oil Sector

FDI in Other Sectors (USD millions) FDI in the Oil Sector (USD millions)

FDI in the Oil Sector (% of total FDI)

The Shocks

• Oil price drop• Bad behavior of neighbor oil producer

countries• Beginning of the tightening cycle by

the FED• Increase sovereign risk premia• Large exchange rate devaluation

(90%)• Strong El Niño Phenomenon and

severe droughts

Source: U.S. Energy Information Administration

0

20

40

60

80

100

120

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Oil Prices (US$/Bl)

WTI Brent

Monetary Policy Responses to external shocks• Initial conditions• Shocks• Impact and channels• Considerations on policy responses



• Terms of trade shocks stronger than in other Latin American countries• The Colombian peso depreciated more

Shocks – Impact and channels

Source: Bloomberg

80

100

120

140

160

180

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Nominal Exchange Rates - Local Currency/USD(Index Jan 2012=100)

Colombia Chile Mexico Peru

Source: Datastream

50

60

70

80

90

100

110

120

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Terms of Trade(Index 2012=100)

Brasil Colombia Chile México Peru

• Government revenues related to oil fell from 3,3% GDP in 2013 to almost 0% in 3 years.

• The large fall in oil and non-commodity exports widened the current account deficit from 3.4% in 2013 to 6.5% in 2015.

1.6%

2.6%

3.3%

2.6%

1.1%

-0.1% -0.01%

0.2% 0.2%0.4%

-0.5%

0.5%

1.5%

2.5%

3.5%

2011 2012 2013 2014 2015 2016 2017* 2018* 2019* 2020*

Government Revenue Related to Oil (% of GDP)

Taxes Dividends Total

Source: Banco de la RepúblicaSource: Ministry of Finance

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

I II III IV I II III IV I II III IV I II III IV I II III IV

2012 2013 2014 2015 2016

Current Account and its Components(USD Millions)

Current Transfers Factor Income Balance of Trade (Goods and Services) Current Account

• Higher food and energy prices due to El Niño affected headline and core inflation.

• The large depreciation also influenced local prices despite a low pass-through.

15.71%

2.49%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Annual Food Inflation(CPI y/y growth)

Source: DANE. Calculations by Banco de la República

5.22%5.35%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Total Tradable and Non-tradable Inflation(Excluding Food and Regulated Items)

Non-Tradable Tradable

• Core inflation rose above target and increased risk of no convergence after the effects of the shocks faded.

• The shocks, although transitory, affected inflation expectations and activated indexation mechanisms. Only at the end of 2016 inflation began to recede.

5.6%

8.97%

4.66%

0%

2%

4%

6%

8%

10%

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

Oct

-16

Apr

-17

Total CPI and CPI Excluding Food(CPI y/y growth)

CPI Excluding Food Headline Inflation

6.75%

0%

2%

4%

6%

8%

10%

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

Oct

-16

Apr

-17

Inflation of Regulated Items(CPI y/y growth)


• Weaker permanent income, lower investments in the oil sector and a slower external demand caused a deceleration of output and absorption.

• Recent indicators suggest that the slowdown could be greater than expected.

1.6%

0.3%

-2%

0%

2%

4%

6%

8%

10%

I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV

2008 2009 2010 2011 2012 2013 2014 2015 2016

Annual Real GDP Growth and Domestic Demand

GDP Domestic Demand


2%

-21

-30

-20

-10

0

10

20

30

40

-2%

0%

2%

4%

6%

8%

10%

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I

2008 2009 2010 2011 2012 2013 2014 2015 2016 17

Consumer Confidence Index and Household Consumption Growth

Household Consumption growth Consumer Confidence Index (right axis)

Source: Fedesarrollo and DANE.

Identification of the nature of shocks• Given the persistent nature of the oil shock, a prudent policy response

would treat it as a permanent phenomenon

Persistent shockPolicy should react to a

fall in permanent national income.

Downward adjustment in domestic expenditure is

required.

▪Macroeconomic policy must accept a deceleration of domestic absorption and output.

▪ Policy should not attempt to restore previous expenditure growth rates.

• If macroeconomic policy did not accept the deceleration of output, risks on fiscal and external sustainability would arise

The exchange rate as shock absorber

• The adjustment to the persistent oil shock includes a sectorial reallocation of production and expenditure. Tradable goods relative prices must rise to induce this reallocation

• Otherwise, the correction of the current account deficit would hinge only on the adjustment of absorption

• Since the currency mismatches of both the private and public sector had been contained, it was possible to allow the exchange rate to depreciate and act as a shocks absorber

Cautious monetary policy

• The recent decline in inflation is mostly driven by the undoing of the supply shocks (food, regulated and tradable good prices).

• In general, any new supply shock may weaken the credibility of the inflation target and raise the cost of reaching it.

Two reasons for a cautious monetary policy response A. Increased inflation inertia (indexation) and imperfect anchoring of inflation

expectations to the target

0

0.1

0.2

0.3

0.4

0.5

0.6

sep-

09

mar

-10

sep-

10

mar

-11

sep-

11

mar

-12

sep-

12

mar

-13

sep-

13

mar

-14

sep-

14

mar

-15

sep-

15

mar

-16

sep-

16

Inflation PersistenceBackward-looking parameter of a Hybrid Phillips curve

Source: Banco de la República

• "Rigid prices" inflation confirms the growing importance of indexation and increased inflation expectations (non tradable goods and services inflation is rising)


8.03%

5.51%5.12%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Annual Inflation of Flexible and Rigid Prices Excluding Food and Regulated Items

Flexible Prices Inflation Rigid Prices Inflation

• The credibility of the inflation target was weakened after more than two years of inflation exceeding the 3% target

• Inflation expectations of analysts rose less than headline inflation, but still remain above the 3% target

4.69%4.39%4.16%

2%

3%

4%

5%

6%

7%

8%

9%

I II III IV I II III IV I II III IV I

2014 2015 2016 2017

Headline Inflation ExpectationsQuarterly Survey

Observed Inflation 1 Yr Expectations 2 Yr Expectations


B. Uncertainty about the new levels of potential growth and natural interest rates• Factors pushing down potential growth and natural interest rates: a)

Lower TOT, b)more expensive imported capital goods c) declining growth of labor force

• Productivity gains from infrastructure and peace are to be seen• Lower potential growth would imply a reduced natural interest rate,…• But possibly increasing external borrowing costs would push them up

è As a result, uncertainty on the size of the output gap or the neutral stance of monetary policy

3.3%2.8%

4.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Annual Observed Growth

Potential Growth

Minimum Potential Growth

Maximum Potential Growth

Estimates of Potential GDP Growth

Source: The maximum and minimum levels of potential non-inflationary growth are calculated by the IMF. The mid level assumesa 2% per capita growth, population growth of 1% and productivity growth of 0,3%.

Estimates of the Neutral Interest Rate for Colombia (IMF)

MethodNeutral Real Interest Rate

Neutral Nominal Interest Rate

Nominal Monetary Policy Gap (bps)

Uncovered Interest Parity 0.6 4.6 -264Expected-Inflation Augmented Taylor Rule 1.0 5.0 -224Consumption Based CAPM 3.1 7.1 -14HP-Filter 2.2 6.2 -104Average 1.7 5.7 -151.5

Source: IMF (2017). Selected Issues Papers

Inflation expectations vs 3% and Ygap

0.09

-1.56

1.09

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

oct-0

3 mar-04

ago-04

en

e-05

jun-05

no

v-05

ab

r-06

sep-06

feb-07

jul-0

7 dic-07

may-08

oct-0

8 mar-09

ago-09

en

e-10

jun-10

no

v-10

ab

r-11

sep-11

feb-12

jul-1

2 dic-12

may-13

oct-1

3 mar-14

ago-14

en

e-15

jun-15

no

v-15

ab

r-16

sep-16

feb-17

inf_esp-inf_meta4% y_gap_trim inf_esp-inf_meta3%


• Initial Situation• The shocks• Their effects and channels• Considerations for policy responses

• Nature of shocks• Exchange rates as shock absorber• Cautious monetary policy


• To control inflation and to keepinflation expectations anchored, theCentral Bank raised is key interestrate from 4.5% in September 2015 to7.75% in July 2016

• Public expenditure was reduced and atax reform was adopted

• As inflation began to recede andconsidering the risks of a excessiveslowdown, the Board has reduced thebenchmark interest rate by 125 bps.between December 2016 and April2017

Policy Responses

10%

3%

5.25%

3.25%

4.5%

7.…

6.5%

0%

2%

4%

6%

8%

10%

12%

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Policy Interest Rate


GDP Growth: 2017 and 2018(%)

Source: Latin American Consensus Forecast , april 2017

3.6 3.7 3.62.8 2.5 2.3 1.8 1.6 1.5 1.8

0.8 0.50.0

-4.4

4.0 3.6 3.83.0 3.0 3.0

2.6 2.12.5 2.5 2.3 2.4

0.7

-1.0

-5-4-3-2-1012345

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monetary policy and external shocks: colombia ciii meeting, cemla€¦ · (index jan 2012=100)...

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