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In the April Monetary Policy Report (previous Inflation Report), the Issuer’s Technical Team projects that Colombia’s inflation will end in 2020 between 1% and 3%.
In the previous report, the inflation forecast for the end of the year was 3.1%.
“Policies to confront the pandemic would have a significant downward effect on core inflation, mainly in the second quarter. In this period, social isolation measures would be stricter, with the consequent closure of some markets. In addition, in this quarter the price control measures and reduction of taxes and tariffs would be in force, as well as the closure or limitations of the commercial operation. It should be considered that, given the temporary closure of non-essential establishments in some months of this quarter, there could be significant challenges in the collection of information used to calculate the CPI, ”says the issuer’s document.
He adds that demand would continue to be affected for several quarters, which would limit price increases in general. This would constitute the main determinant of the evolution of tradable and non-tradable baskets in the forecast horizon.
It also explains that food inflation would fall during the year, as a consequence of weak demand and a supply that would continue to be adequate.
It is worth mentioning that Banco de la República’s inflation range is between 2% and 4% and that the target is 3%.
Economic growth
The Technical Team said in the report that the duration and the effects that the coronavirus can bring on the Colombian economy are still unknown, which is why it is still difficult to project a growth projection of the Gross Domestic Product (GDP).
“The Colombian economy, like most of the world’s economies, faces a shock to growth, of uncertain magnitude and duration, due to the spread of Covid-19 and the health emergency that this has caused. However, the information and analysis available at the time of writing this report were not sufficient to establish, with a reasonable level of certainty, how far the epidemic would have spread in Colombia and what would be its evolution in the coming months, ”says the text. .
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“But, even with greater clarity on the epidemiological aspect of the phenomenon, many additional uncertainty values remain that make the GDP forecasting exercise very complex,” added the document, which explains that, to date, the ranges within which could move forecasts are “exceptionally broad”.
Due to the above, the Issuer’s Technical Team proposes a simulation of GDP for the remainder of the year, rather than a strict forecasting exercise.
“A traditional forecasting exercise requires being able to attribute a specific probability of occurrence to each proposed scenario, something that, in current circumstances, with a high level of uncertainty on multiple fronts, and a situation without historical precedent, may be uninformative. Under these conditions, the conventional use of forecasting methods can generate biased and unreliable results, since there is no historical evidence of a joint shock like the one being faced and normal behavior of the goods markets cannot be assumed. and financial. However, the simulation exercise contemplates some assumptions that the consensus of the Banco de la República technical team can qualify as reasonable, given the current conditions, ”he indicated.
Taking into account the above, the simulation carried out for the second quarter, using the input-output matrix methodology, suggests a strong contraction in GDP that could range between 10% and 15%.
Taking into account the forecast for the first quarter of 2% and that of the simulation for the second quarter previously explained, the different simulation exercises, using the dynamic and static models of the bank, suggest that growth would be in 2020 between – 2% and -7% ”, says the document.
The Technical Team explains that, in a scenario of gradual relaxation of measures of social distancing and restoration of confidence, it is possible to expect a gradual recovery of the economy for the second half of the year, which should continue in 2021.
The report argues that the output gap, which was estimated to be slightly negative in the January report, would widen considerably in 2020, although the uncertainty about the size of excess productive capacity is significant.
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