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COLOMBIA: JP Morgan Says Fiscal Considerations May Have Less Weight For BanRep

COLOMBIA
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  • JP Morgan says that the BanRep minutes were rich on fiscal-monetary relations and the discussion on crowding out and impact on monetary policy stands out. They note that financing the fiscal deficit has competed with private sector demands, with almost half of total resources that reached the banking sector last year absorbed by government financing needs. Another director noted that the contractionary monetary stance is the result of significant fiscal imbalances that inevitably place the burden of achieving macro stability on monetary policy.
  • Fiscal considerations may begin to have less weight in BanRep’s reaction function, at least temporarily, due to the new composition of the Board. In this context, the rationale of the Board member who voted for a 25bp cut gains significance. This director emphasised the progress on disinflation and believes that lower rates would help accelerate growth, thereby increasing tax revenues.
  • JPM believes that this latter understanding of the monetary and fiscal interplay is likely to dominate future voting majorities. However, what is absent from the dovish argument is the possibility that such an accommodative monetary policy could lead to a higher natural rate of interest over time, especially if the fiscal stance is not adjusted in structural terms. In an extreme scenario, fiscal dominance could eventually prevail.
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  • JP Morgan says that the BanRep minutes were rich on fiscal-monetary relations and the discussion on crowding out and impact on monetary policy stands out. They note that financing the fiscal deficit has competed with private sector demands, with almost half of total resources that reached the banking sector last year absorbed by government financing needs. Another director noted that the contractionary monetary stance is the result of significant fiscal imbalances that inevitably place the burden of achieving macro stability on monetary policy.
  • Fiscal considerations may begin to have less weight in BanRep’s reaction function, at least temporarily, due to the new composition of the Board. In this context, the rationale of the Board member who voted for a 25bp cut gains significance. This director emphasised the progress on disinflation and believes that lower rates would help accelerate growth, thereby increasing tax revenues.
  • JPM believes that this latter understanding of the monetary and fiscal interplay is likely to dominate future voting majorities. However, what is absent from the dovish argument is the possibility that such an accommodative monetary policy could lead to a higher natural rate of interest over time, especially if the fiscal stance is not adjusted in structural terms. In an extreme scenario, fiscal dominance could eventually prevail.