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Colombia to Grow Slower than Expected

By Bertrand Delgado and Juan Lorenzo Maldonado

On October 8, the central bank (Banrep) published the minutes of its September 24 monetary policy meeting, at which the target rate was kept unchanged at 3%. Banrep offered a less optimistic view on domestic and global activity—on the inflation side, and referring to the August inflation data, the minutes still mentioned that there was a high degree of confidence that inflation will converge to the target range in 2010 and 2011. Meanwhile, the view on the local economy has deteriorated, signaling a slower growth than previously expected for 2010.

The global economy continues to grow, although prospective growth in the U.S., Japan and Europe is likely to be lower than expected. The main Colombian trade partners in Latin America have shown robust growth in H1 2010, but they are also expected to normalize from hereon. Still, the minutes highlighted the rapid growth in Latin America and Asia and mentioned that the balance of risks is determined by a recovering economy with an inflation rate that lies within the long-term target.

Overall, the tone of the minutes was dovish as it reflected a deteriorated view on growth dynamics and an improved inflation outlook, in line with our assessment. We maintain our view that the central bank will stay on hold for the rest of the year and in 2011, given a benign inflation forecast, slow closing of the output gap and the global slowdown. Moreover, strong currency is helping on the inflation front.

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