Academic literature on the topic 'Low-Interest Rate Policy'

This article stylizes the monetary policy features applied during the chairmanship of Mr. Alan Greenspan and condenses statistical discussion into the “low interest rate trap” in the U.S. economy. Data from the U.S. in the decade prior to the 2008 financial crisis are used. A monetarist solution to the “low interest rate trap” is provided. The paper challenges the theoretical discussion on the Keynes’ interest rate – output relationship, and poses the question whether difference in investment returns would present a different picture in output growth.

Abstract This paper scrutinizes the role of prolonged, expansionary monetary policy on the saving behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low saving. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household saving behavior via the interest rate channel but not the labor income channel. There is also evidence that rising government deficits come along with declining household saving and that rising wealth boosts saving.

A model is constructed in which households and banks have incentives to fake the quality of collateral. These incentive problems matter when collateral is scarce in the aggregate—when real interest rates are low. Conventional monetary easing can exacerbate these problems, in that the misrepresentation of collateral becomes more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to the misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal policy, not by mitigating incentive problems in asset markets. (JEL E43, E52, E58, E62, G21)

We propose a unique time-varying identification approach to the market interest rate based on Taylor Rule for coordinating the monetary and exchange rate policies. The significant differences exist between real and market interest rates — 2001 and 2009 are high real interest rates, and 2004-2005 and 2010-2012 low real interest rates — that identify monetary and exchange rate policy conflicts in China. These conflicts derive from the indirect effect of monetary factor through interest rate inertia and expected output gap in 2001; the indirect effect of exchange rate factor through interest rates and inflation inertia in 2004-2005; the direct effects of monetary and the exchange rate factors and the indirect effects through interest rate and inflation inertia, and the expected inflation and output gap since 2009. Our empirical results provide decision support for the monetary and exchange rate policy for reforming Chinese market interest rates.

碩士
淡江大學
經濟學系碩士班
95
In recent years, the interest rates in Taiwan are relative low, however the economy grows slowly. It is suggested that the job central bank to decrease interest rates and to promote outputs doesn''t work out. Thus, this paper will take a monetary view to investigate the process of monetary policy transmission mechanism. We use the impulse response and variance decomposition of VAR (vector autoregressive) model to discuss whether monetary policy effective in Taiwan and Japan during the observation periods. According to the results of impulse response, we found that the monetary policy was ineffective in both Taiwan and Japan. It implies that the three price channels-- interest rate, exchange rate and stock price channels, don''t work in the sample periods. Especially, there might be some investment traps for interest rate channel in Taiwan. Besides, there is a liquidity trap in Japan, which is in accordance with what the Keynesians argued. Finally, the outcomes of variance decomposition confirm the results obtained from impulse response model.

碩士
國立臺灣大學
經濟學研究所
105
Monetary authorities typically manipulated short-term nominal interest rate in order to smooth domestic price and production. However, the effectiveness of such policy become doubtful when the nominal interest rate is close to the zero lower bound. This paper applies Markov Chain Monte Carlo (MCMC) methods to estimate a time-varying parameter model and attempts to evaluate the effectiveness of Japanese monetary policies through interest rate channel in recent years. The main empirical conclusions of the paper are as follows. First, the effect of monetary policy through the interest rate channel as well as exogenous shocks show time varying effects between 1975 and 2015. Second, a shock of decreasing interest rate have little positive effect on the production and the unemployment rate, which is supported by the view that the quantitative easing policy in recent years is difficult to stimulate the economy through the interest rate channel.

碩士
國立臺灣師範大學
高階經理人企業管理碩士在職專班(EMBA)
105
Abstract When the economy is depression, there is the risks that erode the investment principal in the economic environment. At this time, the government will adopt a low interest rate policy to increase the investment willingness. However, what is the reason why the investment is still low? We interview 18 individuals who have investment planning. The results of the interview found that when the economy is depression, the government would offer a low interest rate policy to attract investment intentions. However, low interest rates for investors, only the cost of capital to prepare for investment fell, and the problem of depression economy not be disposed, so low interest rate policy appears invalid phenomenon. On the other hand, when the economy is depression, the respondents feel that the external economic risks that erode the principal, and risk will make the investors feel the economy is even worse, so the opportunity to lose high investment opportunities, So the investment will be low.

In 2020 the world was confronted with the outbreak of the corona crisis. The following case looks at the banking sector and analyses how a major German bank (Commerzbank AG) has dealt with the crisis. What was the main driver to release a new strategy? Which measures were taken because of the pandemic and which effects would have occurred independently? To answer these questions an analysis is conducted, using several strategic frameworks. This case study follows a pedagogical structure, which aims at providing a profound understanding of how banks may reorientate and adapt their strategies in times of crises. Therefore, a special focus is put on the external environment. Sine the case at hand reflects a real-life example, it is suitable for a wide range of people interested in the finance industry. The output revealed that the bank was already facing several difficulties due to its external environment. Digitalization and cost pressures were impacting Commerzbank AG. Covid-19 emphasized the need for change and not only enhanced the implementation of trends but also lead to a faster execution of the new strategy.
Em 2020, o mundo foi confrontado com a eclosão da crise do coronavírus. O seguinte caso examina o setor bancário e analisa como um grande banco alemão (Commerzbank AG) lidou com a crise. Qual foi o principal motivo impulsionador de uma nova estratégia? Quais medidas foram tomadas por causa da pandemia e que efeitos teriam ocorrido independentemente desta? Para responder a essas perguntas procedeu-se a uma análise, usando vários quadros estratégicos. Este estudo de caso segue uma estrutura pedagógica, que visa proporcionar uma compreensão profunda de como os bancos podem reorientar e adaptar as suas estratégias em tempos de crise. Portanto, um enfoque especial é colocado no ambiente externo. Se o caso em questão reflete um exemplo da vida real, ele é adequado para uma variedade de agentes interessados no setor financeiro. O resultado deste estudo revelou que o banco já enfrentava várias dificuldades devido ao seu ambiente externo. A digitalização e a pressão de custo impactavam o Commerzbank AG. A Covid-19 enfatizou a necessidade de mudança e não apenas ampliou a implementação de tendências anteriores, mas também levou a uma execução mais rápida da nova estratégia.

Em várias economias desenvolvidas, medidas de política monetária expansionista levaram as taxas de juros da política monetária a níveis historicamente baixos após a crise de 2007/2008. A persistência ao longo do tempo de tal situação levantou a questão de quais são as implicações para o setor financeiro em termos de rentabilidade bancária, pois pode haver consequências para a capacidade dos bancos de conceder empréstimos e para a própria transmissão da política monetária. Desta forma, este estudo tem como objetivo analisar se as reduções na taxa de juros da política monetária levam a reduções na rentabilidade dos bancos e se essa relação é linear com o nível da taxa de juro. Abordamos esta questão com dados de bancos europeus e japoneses no período pós-crise, entre 2010 e 2018, considerando duas medidas para a rentabilidade dos bancos: margens líquidas de juros e retorno sobre os ativos médios. A estimação corrige problemas de endogeneidade seguindo o método generalizado de momentos (GMM) para dados em painel dinâmicos. Os resultados indicam que a rentabilidade bancária aumenta com a diminuição da taxa de juro da política monetária até um certo valor dessa taxa, relativamente baixo. A partir desse mesmo valor, esta relação inverte-se e as variáveis passam a aumentar em simultâneo.
In several developed economies, expansionary monetary policy has driven monetary policy interest rates to historically low levels after the 2007/2008 crisis. The persistence throughout time of such a situation has raised the question of what the implications are for the financial sector in terms of bank profitability, as there might be consequences for banks’ ability to lend and the transmission of monetary policy itself. Therefore, this study aims to analyse whether decreases in the monetary policy rate lead to decreases in bank profitability, and whether this relationship is linear with the level of the policy rate. We approach this issue by analysing European and Japanese banks in the post-crisis period, from 2010 to 2018, considering two measures for bank profitability: net interest margins and return on average assets. The estimation corrects for endogeneity by following a generalised method of moments (GMM) approach for dynamic panel data. The results indicate that bank profitability increases with the decrease of the monetary policy rate up to a certain, low value for that rate. Beyond that same value, this relationship is inverted, and the variables start increasing simultaneously.

The thesis examines the relation of the low-interest rate environment to the banks' selected credit risk measures with a panel dataset on banks in Eurozone, Denmark, Japan, Sweden, and Switzerland covering the period 2011-2017. It employs a system GMM framework and a combination of bank-related and macroeconomic variables. This study builds on recent literature on effects of low-interest rates on banks' profitability and estimates the following three hypotheses: The potential effects of the low-interest rate on non-performing loans (NPL) ratio, risk-weighted assets (RWA) to total assets ratio, and changes in Tier 1 capital ratio. There are three main results: Firstly, the results suggest that a prolonged period of negative monetary interest rate can affect the NPL ratio and reveal a possible relationship between the 3M-interbank interest rate and NPL ratio. Thus, the thesis does not reject the first hypotheses. However, it rejects these hypotheses in case of the other two ratios. Secondly, the study finds a bank heterogeneity to be a significant determinant of the credit risk. Finally, using recent data, this thesis contributes to the literature focusing on the drivers of the NPL ratio, RWA to total assets ratio and Tier 1 capital ratio, where in case of the latter two the existing research is...

AbstractThe German debt brake is not compatible with the long-term stability of the euro. “New thinking” requires that public debt and price stability are no longer opponents, but rather allies in the Keynes world of persistently low interest rates. The proposed balanced account agreement is made more concrete here: An appropriate target (real) interest rate on the global capital market is between one and 1.5% per year lower than the growth rate of the OECD plus China region. If the actual interest rate is below the target rate, the countries with current account surpluses undertake to increase their public debt periodD gradually according to a definite formula. In symmetrical fashion, if the real interest rate is “too high,” countries with current account deficits have the duty to reduce their public debt period. The rules of the balanced account agreement replace the debt brake. They are the instruments of soundfiscal policy.

AbstractWe distinguish between a “Friedman world” and a “Keynes world,” the latter being characterized by the zero lower bound problem. With the natural rate of interest tending to fall over time, the Keynes world is becoming the norm. In the Keynes world, voters defend their interests as producers more than their interests as consumers. This strengthens protectionism at the ballot box. We are less and less able to rely on the USA to serve as the engine of the global economy via its high current account deficits. In addition to the WTO rules, an international fiscal order is needed to rescuefree trade: 1. At low real interest rates, countries with current account surpluses undertake to eliminate them by increasing government net borrowing. 2. At high real interest rates, countries with current account deficits undertake to eliminate them by cutting fiscal expenditure or raising taxes.

AbstractIn the economic area comprising the OECD countries plus China, almost half of private wealth consists of net public debt. Private wealth is nearly twice the size of private real assets. Due to the continuing rise in life expectancy, the share of public debt in private wealth is growing. As long as public debt does not become too great, real interest rates can be low, but positive in the twenty-first century. The main reason for this is private retirement planning in light of high life expectancy. Investment cannot keep up with increasing private saving. In the twenty-first century, public debt is a macroeconomic steering instrument. Fiscal policy uses it to ensure that a positive, but low real interest rate level continues to prevail.

The chapter explores business cycles and growth dynamics in emerging East Asia within an ultra-low interest rate environment from the perspective of the monetary overinvestment theories of Mises and Hayek. It argues that, given a low interest rate environment in the large industrialized countries, the likelihood of overinvestment and therefore a crisis in emerging East Asia has increased independently from the exchange rate regime. Overinvestment can take the form of unsustainable booms on stock and real estate markets (as in Southeast Asia prior to the Asian crisis) or the misallocation of funds due to subsidized state-directed capital allocation (as is currently occurring in the People’s Republic of China). If further credit expansion counteracts a crisis triggered by a preceding overinvestment boom, it paralyses growth in the long term, as Japan experienced.

This chapter explores the monetary transmission mechanism (MTM) in low financial development countries (LFDCs). It successively discusses the interest rate, asset price, bank credit, balance sheet, expectations, and real balance channels. For each channel, conceptual aspects about how it operates, how it transmits monetary policy impulses to the economy’s financial and real spheres, are first presented. Next, the impact of the specificities of LFDCs on the channel’s strength and reliability are examined and the available empirical evidence is surveyed. The chapter concludes with a global assessment of the effectiveness of the monetary transmission mechanism in LFDCs. Evidence points to a transmission mechanism that is effective although not very strong, and possibly also more uncertain than in advanced and emerging market countries.

This chapter discusses how, in the 1970s and 1980s, Norges Bank began to develop instruments with a view to steering economic policy under freer market conditions. However, governments of changing political hues were unwilling to let go of the low interest rate. The oil price fall in 1986 brought an abrupt change in interest rate and credit policy. The government’s tightening actions included the introduction of a more binding fixed exchange rate policy. The frequent recourse to corrective devaluations was to be a thing of the past. Hence, there was a justification for using the interest rate as an ongoing instrument to stabilize the exchange rate. This task fell to Norges Bank. The transition to an independent, active interest rate policy on the part of the central bank was abrupt and came as a surprise. Barely a year before the collapse of the oil price, the Storting had passed a law that made Norges Bank one of the least autonomous central banks in all of western Europe. Ultimately, it was the external situation, and in no sense an increase in government’s and the public’s recognition of the bank and its institutional legitimacy, that restored greater operative autonomy to Norges Bank.

This epilogue reflects on the future of central banks. The Bank of Japan was the first central bank to find itself stuck in the “low-for-long” world, meaning that low-interest rates persist for an extended period of time. At some point in time, the low-for-long world will inevitably be forced to change. What will unfold might be inflation, a financial bubble and subsequent financial crisis, social discontent due to widening inequalities in wealth, a continuous decline in the growth rate, or some combination of these factors. Witnessing how the economy and society are now being profoundly impacted by the global pandemic of the COVID-19 virus, one certainly cannot rule out something happening that is beyond current imagination. Central banks are thus faced with enormous challenges. The current conundrum reflects underlying political, social, and technological trends that are largely beyond the control of central banks. Nevertheless, they should take the lead in reconsidering the current monetary policy framework.

Chapter 4 presents a different conception of group-interested representational activity: race-gender policy leadership, or sponsoring legislation that addresses issues of race and gender, the interests of women and racial/ethnic minorities, or the interests of intersectionally disadvantaged subgroups of women and minorities, such as poor women of color. Employing this more intersectionally capacious definition of substantive representation offers additional insight into the distinctive policy leadership of women of color. Further analysis of bill sponsorship patterns in 15 state houses across two decades reveals that women of color are more likely than any other race-gender group of legislators to engage in two forms of race-gender policy leadership. Latinas are most likely to sponsor “one of each”—at least one women’s interest bill and one minority interest bill. Black women are most likely to sponsor “welfare/poverty” bills that address the interests of low-income individuals and communities subject to multiple, intersecting disadvantages.

International capital flows have been on an unprecedented roller-coaster ride in recent years. Capital flows to emerging market economies have been strongly correlated with changes in global financing conditions, rising sharply during periods with relatively low global interest rates and low VIX (called risk-on) and shrinking afterward. In open emerging market economies, interest rate increases can attract excessive capital inflows appreciating the exchange rate, and leading to excessive borrowing in foreign currency, and encouraging leverage. A well-designed macro prudential policy prevents credit –driven bubble and mitigating pro-cyclicality of capital flows.

Flexible energy carriers are a crucial element of our energy portfolio. In a future in which a significant fraction of our energy comes from renewable sources, renewably produced fuels will be vital. The zinc/zinc-oxide thermochemical redox cycle is one approach for producing hydrogen using solar energy. This paper explores the level of carbon taxation necessary to make the cycle competitive with hydrogen production via methane reforming. In addition, the time frame for economic viability is assessed through the use of experience curves under minimal input, mid-range, and aggressive incentive policy scenarios. Prior work projects that hydrogen produced by the zinc/zinc-oxide cycle will cost between $5.02 and $14.75/kg, compared to $2.40 to $3.60/kg for steam methane reforming. Overcoming this cost difference would require a carbon tax of $119 to $987/tCO2, which is significantly higher than is likely to be implemented in most countries. For the technology to become cost competitive, incentive policies that lead to early implementation of solar hydrogen plants will be necessary to allow the experience effect to draw down the price. Under such policies, a learning curve analysis suggests that hydrogen produced via the Zn/ZnO cycle could become economically viable between 2032 and 2069, depending on how aggressively the policies encourage the emerging technology. Thus, the Zn/ZnO cycle has the potential to be economically viable by mid-century if incentive policies—such as direct financial support, purchase guarantees, low interest rate loans, and tax breaks—are used to support initial projects.

The work is aimed at solving one of the most important fundamental and topical interdisciplinary scientific problems of the Russian Federation – the need for scientific substantiation of optimal options for the functioning of state policy in the field of use, protection, protection and reproduction of forests in the Russian Federation through economic mechanisms aimed at effective management of the forest sector of the economy and increasing gross domestic product in the forestry sector based on market demand for products. Hence, there is a special interest in the processes of the spatio-temporal dissemination of innovations for the country’s forestry complex, especially which are the guarantor and basis of intensive forestry, but due to the specifics of my reproduction, I have a deferred economic effect relative to similar innovative products obtained with the help of basic technologies. The paper provides an analytical review of the rate of diffusion of innovations in the sectors of the forestry complex based on the analysis of reliable and objective indicators, in accordance with which it was concluded that the rate of spread of innovative forestry products in time and space is extremely low. It has been established that one of the factors preventing the diffusion of innovative forestry products is the high cost of their creation and the uncertainty of the result obtained. It has been established that the high capital costs of creating an innovative product for commercial use must be compared with biological advantages: growth rate, resistance to diseases and pests, productivity.

European sovereign debt crisis is the period that because of low interest rates, government and private debt increased substantially and also financial crisis transform private debt to high sovereign debt. In this period, low interest rates made government borrowing cost cheap and so sovereign debt increased considerably. In same period, private sector consumption and debt rose and this induced the housing bubbles. The expansionary fiscal policy against the effects of global financial crisis and bail-outs given to banks which are problematic made the sovereign debt highest and debt burden unsustainable for some countries. European sovereign debt crisis affect the world globally with the financial and economic links. Countries implemented fiscal and monetary policies against the recession and unemployment. In this respect, it is worthwhile researching the European sovereign debt crisis which is multifaceted and complex and offering suggestions for Turkey. Turkey must maintain the strong fiscal position and increased country resilience against crisis. And Turkey must also maintain banking regulation and supervision which are intended to steady financial sector. The aim of this paper is analyzing the development of European sovereign debt crisis and its effects; and also emphasizing the actions Turkey can take and offering suggestions for Turkey.

To help meet the nation’s energy needs, recycling of partially used nuclear fuel is required to close the nuclear fuel cycle, but implementing this step will require considerable investment. This report evaluates financing scenarios for integrating recycling facilities into the nuclear fuel cycle. A range of options from fully government owned to fully private owned were evaluated using DPL (Decision Programming Language 6.0), which can systematically optimize outcomes based on user-defined criteria (e.g., lowest life-cycle cost, lowest unit cost). This evaluation concludes that the lowest unit costs and lifetime costs are found for a fully government-owned financing strategy, due to government forgiveness of debt as sunk costs. However, this does not mean that the facilities should necessarily be constructed and operated by the government. The costs for hybrid combinations of public and private (commercial) financed options can compete under some circumstances with the costs of the government option. This analysis shows that commercial operations have potential to be economical, but there is presently no incentive for private industry involvement. The Nuclear Waste Policy Act (NWPA) currently establishes government ownership of partially used commercial nuclear fuel. In addition, the recently announced Global Nuclear Energy Partnership (GNEP) suggests fuels from several countries will be recycled in the United States as part of an international governmental agreement; this also assumes government ownership. Overwhelmingly, uncertainty in annual facility capacity led to the greatest variations in unit costs necessary for recovery of operating and capital expenditures; the ability to determine annual capacity will be a driving factor in setting unit costs. For private ventures, the costs of capital, especially equity interest rates, dominate the balance sheet; and the annual operating costs, forgiveness of debt, and overnight costs dominate the costs computed for the government case. The uncertainty in operations, leading to lower than optimal processing rates (or annual plant throughput), is the most detrimental issue to achieving low unit costs. Conversely, lowering debt interest rates and the required return on investments can reduce costs for private industry.

The ports of the world are operated by port authorities. The systems for establishing port facilities are roughly classified into two types depending on their sources of revenue. In the first type of system (used mainly for channels, breakwaters, berths, etc.), the national/local government and the port authority share the cost of construction. In the second type of system (used for cargo handling facilities, reclaimed lands, etc.), the port authority alone raises funds through a port-related bond-financed project and issues bonds. One characteristic of such bond-financed projects is that the costs of operating the facility and redeeming the bonds are funded through usage fees for the ground and profit from the sale of reclaimed land. Port authorities now require a smooth redemption policy for bonds issued in the past. However, port authorities have found it difficult to choose between having to raise usage fees and land prices high enough to enable smooth redemption in bond-financed projects on the one hand and having to reduce usage fees and land prices to reinforce international competitiveness in port logistics on the other. Unless a solution to this problem is found quickly, the finances of port authorities may become even more constrained, given the rising trend in port construction costs due to the risks of disasters such as earthquakes and due to growing interest rates. This is because prior investments are required for the construction of port facilities that takes a long time (between 5 and 10 years) and usage fees and profits from the sale of land must be suppressed to low levels because of political pressure. This will lead to larger bond issues and therefore a greater necessity for a smooth redemption policy of port facilities in the case of ocean space utilization. The authors first describe the structure of port management in the world, and analyze the financial situation of port authorities. Next, the authors point out that as the capital, maintenance, and management costs of port facilities grow in response to large-scale natural disasters, which exceed existing assumptions, and other factors, port authorities are being forced to take measures to address this. Lastly, the authors argue that public incentive assistance to shipping companies and logistics companies can effectively address the conflicting demands of reinforcing international competitiveness, strengthening disaster restoration capabilities, and enabling the smooth redemption of bonds in bond-financed projects.

The electric power industry in the United States will face a number of great challenges in the next two decades, including increasing electricity demand and the aging of the current fleet of power plants. These challenges present a major test for the industry, which must invest between $1.5 trillion and $2 trillion by 2030 to meet the increased demand. In addition to these challenges, the potential for climate legislation, controversy over hydraulic fracturing, and post-Fukushima safety concerns have all resulted in significant uncertainty regarding the economics of all major sources of base-load electricity. Currently nuclear power produces 22% of the nation’s electricity, and over 70% of the nation’s low-carbon electricity, even though unfavorable economic conditions have stalled construction of new reactors for over 30 years. The economics are changing, however, as evidenced by the recent construction and operating licenses (COLs) awarded by the Nuclear Regulatory Commission to Southern Company and SCANA Corporation to build two new units each. The successful construction of these units could lead to more favorable financing for future plants. This improved financing, especially if combined with appropriate additional government support, could provide serious momentum for the resurgence of nuclear power in the United States. The most important way in which government support could benefit nuclear power is by increasing the amount of loan guarantees provided to the first wave of new nuclear power plants. This will help encourage additional new builds, which will help reduce the financing risk premium for new nuclear and improve interest rates for future plants. Instead of simply increasing loan guarantees for nuclear energy, a permanent federal financing structure should be established to provide loan guarantees for “clean energy” technologies in general, a category in which nuclear energy should be included. Most importantly, any changes should be made as part of a coherent, long-term energy policy, which would provide utilities with the correct tools to make the necessary investments, and the confidence that will allow them to undertake large-scale projects.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.

We develop a small open economy model with nominal rigidities and fragmented labor markets to study the response of the monetary policy to a migration shock. Migrants are characterized by their productivity levels, their restrictions to accumulate capital, as well as by the flexibility of their labor income. Our results show that the monetary policy response depends on the characteristics of migrants and the local labor market. An inflow of low(high)-productivity workers reduces(increases) marginal costs, lowers(raises) inflation expectations and pushes the Central Bank to reduce(increase) the interest rate. The model is calibrated to the Colombian economy and used to analyze a migratory inflow of financially constraint workers from Venezuela into a sector with flexible and low wages.

Macroeconomic summary Several factors contributed to an increase in projected inflation on the forecast horizon, keeping it above the target rate. These included inflation in December that surpassed expectations (5.62%), indexation to higher inflation rates for various baskets in the consumer price index (CPI), a significant real increase in the legal minimum wage, persistent external and domestic inflationary supply shocks, and heightened exchange rate pressures. The CPI for foods was affected by the persistence of external and domestic supply shocks and was the most significant contributor to unexpectedly high inflation in the fourth quarter. Price adjustments for fuels and certain utilities can explain the acceleration in inflation for regulated items, which was more significant than anticipated. Prices in the CPI for goods excluding food and regulated items also rose more than expected. This was partly due to a smaller effect on prices from the national government’s VAT-free day than anticipated by the technical staff and more persistent external pressures, including via peso depreciation. By contrast, the CPI for services excluding food and regulated items accelerated less than expected, partly reflecting strong competition in the communications sector. This was the only major CPI basket for which prices increased below the target inflation rate. The technical staff revised its inflation forecast upward in response to certain external shocks (prices, costs, and depreciation) and domestic shocks (e.g., on meat products) that were stronger and more persistent than anticipated in the previous report. Observed inflation and a real increase in the legal minimum wage also exceeded expectations, which would boost inflation by affecting price indexation, labor costs, and inflation expectations. The technical staff now expects year-end headline inflation of 4.3% in 2022 and 3.4% in 2023; core inflation is projected to be 4.5% and 3.6%, respectively. These forecasts consider the lapse of certain price relief measures associated with the COVID-19 health emergency, which would contribute to temporarily keeping inflation above the target on the forecast horizon. It is important to note that these estimates continue to contain a significant degree of uncertainty, mainly related to the development of external and domestic supply shocks and their ultimate effects on prices. Other contributing factors include high price volatility and measurement uncertainty related to the extension of Colombia’s health emergency and tax relief measures (such as the VAT-free days) associated with the Social Investment Law (Ley de Inversión Social). The as-yet uncertain magnitude of the effects of a recent real increase in the legal minimum wage (that was high by historical standards) and high observed and expected inflation, are additional factors weighing on the overall uncertainty of the estimates in this report. The size of excess productive capacity remaining in the economy and the degree to which it is closing are also uncertain, as the evolution of the pandemic continues to represent a significant forecast risk. margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. The technical staff revised its GDP growth projection for 2022 from 4.7% to 4.3% (Graph 1.3). This revision accounts for the likelihood that a larger portion of the recent positive dynamic in private consumption would be transitory than previously expected. This estimate also contemplates less dynamic investment behavior than forecast in the previous report amid less favorable financial conditions and a highly uncertain investment environment. Third-quarter GDP growth (12.9%), which was similar to projections from the October report, and the fourth-quarter growth forecast (8.7%) reflect a positive consumption trend, which has been revised upward. This dynamic has been driven by both public and private spending. Investment growth, meanwhile, has been weaker than forecast. Available fourth-quarter data suggest that consumption spending for the period would have exceeded estimates from October, thanks to three consecutive months that included VAT-free days, a relatively low COVID-19 caseload, and mobility indicators similar to their pre-pandemic levels. By contrast, the most recently available figures on new housing developments and machinery and equipment imports suggest that investment, while continuing to rise, is growing at a slower rate than anticipated in the previous report. The trade deficit is expected to have widened, as imports would have grown at a high level and outpaced exports. Given the above, the technical staff now expects fourth-quarter economic growth of 8.7%, with overall growth for 2021 of 9.9%. Several factors should continue to contribute to output recovery in 2022, though some of these may be less significant than previously forecast. International financial conditions are expected to be less favorable, though external demand should continue to recover and terms of trade continue to increase amid higher projected oil prices. Lower unemployment rates and subsequent positive effects on household income, despite increased inflation, would also boost output recovery, as would progress in the national vaccination campaign. The technical staff expects that the conditions that have favored recent high levels of consumption would be, in large part, transitory. Consumption spending is expected to grow at a slower rate in 2022. Gross fixed capital formation (GFCF) would continue to recover, approaching its pre-pandemic level, though at a slower rate than anticipated in the previous report. This would be due to lower observed GFCF levels and the potential impact of political and fiscal uncertainty. Meanwhile, the policy interest rate would be less expansionary as the process of monetary policy normalization continues. Given the above, growth in 2022 is forecast to decelerate to 4.3% (previously 4.7%). In 2023, that figure (3.1%) is projected to converge to levels closer to the potential growth rate. In this case, excess productive capacity would be expected to tighten at a similar rate as projected in the previous report. The trade deficit would tighten more than previously projected on the forecast horizon, due to expectations of an improved export dynamic and moderation in imports. The growth forecast for 2022 considers a low basis of comparison from the first half of 2021. However, there remain significant downside risks to this forecast. The current projection does not, for example, account for any additional effects on economic activity resulting from further waves of COVID-19. High private consumption levels, which have already surpassed pre-pandemic levels by a large margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. External demand for Colombian goods and services should continue to recover amid significant global inflation pressures, high oil prices, and less favorable international financial conditions than those estimated in October. Economic activity among Colombia’s major trade partners recovered in 2021 amid countries reopening and ample international liquidity. However, that growth has been somewhat restricted by global supply chain disruptions and new outbreaks of COVID-19. The technical staff has revised its growth forecast for Colombia’s main trade partners from 6.3% to 6.9% for 2021, and from 3.4% to 3.3% for 2022; trade partner economies are expected to grow 2.6% in 2023. Colombia’s annual terms of trade increased in 2021, largely on higher oil, coffee, and coal prices. This improvement came despite increased prices for goods and services imports. The expected oil price trajectory has been revised upward, partly to supply restrictions and lagging investment in the sector that would offset reduced growth forecasts in some major economies. Elevated freight and raw materials costs and supply chain disruptions continue to affect global goods production, and have led to increases in global prices. Coupled with the recovery in global demand, this has put upward pressure on external inflation. Several emerging market economies have continued to normalize monetary policy in this context. Meanwhile, in the United States, the Federal Reserve has anticipated an end to its asset buying program. U.S. inflation in December (7.0%) was again surprisingly high and market average inflation forecasts for 2022 have increased. The Fed is expected to increase its policy rate during the first quarter of 2022, with quarterly increases anticipated over the rest of the year. For its part, Colombia’s sovereign risk premium has increased and is forecast to remain on a higher path, to levels above the 15-year-average, on the forecast horizon. This would be partly due to the effects of a less expansionary monetary policy in the United States and the accumulation of macroeconomic imbalances in Colombia. Given the above, international financial conditions are projected to be less favorable than anticipated in the October report. The increase in Colombia’s external financing costs could be more significant if upward pressures on inflation in the United States persist and monetary policy is normalized more quickly than contemplated in this report. As detailed in Section 2.3, uncertainty surrounding international financial conditions continues to be unusually high. Along with other considerations, recent concerns over the potential effects of new COVID-19 variants, the persistence of global supply chain disruptions, energy crises in certain countries, growing geopolitical tensions, and a more significant deceleration in China are all factors underlying this uncertainty. The changing macroeconomic environment toward greater inflation and unanchoring risks on inflation expectations imply a reduction in the space available for monetary policy stimulus. Recovery in domestic demand and a reduction in excess productive capacity have come in line with the technical staff’s expectations from the October report. Some upside risks to inflation have materialized, while medium-term inflation expectations have increased and are above the 3% target. Monetary policy remains expansionary. Significant global inflationary pressures and the unexpected increase in the CPI in December point to more persistent effects from recent supply shocks. Core inflation is trending upward, but remains below the 3% target. Headline and core inflation projections have increased on the forecast horizon and are above the target rate through the end of 2023. Meanwhile, the expected dynamism of domestic demand would be in line with low levels of excess productive capacity. An accumulation of macroeconomic imbalances in Colombia and the increased likelihood of a faster normalization of monetary policy in the United States would put upward pressure on sovereign risk perceptions in a more persistent manner, with implications for the exchange rate and the natural rate of interest. Persistent disruptions to international supply chains, a high real increase in the legal minimum wage, and the indexation of various baskets in the CPI to higher inflation rates could affect price expectations and push inflation above the target more persistently. These factors suggest that the space to maintain monetary stimulus has continued to diminish, though monetary policy remains expansionary. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) in its meetings in December 2021 and January 2022 voted to continue normalizing monetary policy. The BDBR voted by a majority in these two meetings to increase the benchmark interest rate by 50 and 100 basis points, respectively, bringing the policy rate to 4.0%.

Macroeconomic summary The Colombian economy sustained numerous shocks in the second quarter, pri¬marily related to costs and supply. The majority of these shocks were unantic¬ipated or proved more persistent than expected, interrupting the recovery in economic activity observed at the beginning of the year and pushing overall inflation above the target. Core inflation (excluding food and regulated items) increased but remained low, in line with the technical staff’s expectations. A third wave of the pandemic, which became more severe and prolonged than the previous outbreak, began in early April. This had both a high cost in terms of human life and a negative impact on Colombia's economic recovery. Between May and mid-June roadblocks and other disruptions to public order had a sig¬nificant negative effect on economic activity and inflation. The combination and magnitude of these two shocks likely led to a decline in gross domestic product (GDP) compared to the first quarter. Roadblocks also led to a significant in¬crease in food prices. The accumulated effects of global disruptions to certain value chains and increased international freight transportation prices, which since the end of 2020 have restricted supply and increased costs, also affected Colombia’s economy. The factors described above, which primarily affected the consumer price index (CPI) for goods and foods, explain to a significant degree the technical staff’s forecast errors and the increase in overall inflation above the 3% target. By contrast, increases in core inflation and in prices for regulated items were in line with the technical staff’s expectations, and can be explained largely by the elimination of various price relief measures put in place last year. An increase in perceived sovereign risk and the upward pressures that this im¬plies on international financing costs and the exchange rate were further con¬siderations. Despite significant negative shocks, economic growth in the first half of the year (9.1%) is now expected to be significantly higher than projected in the April re¬port (7.1%), a sign of a more dynamic economy that could recover more quickly than previously forecast. Diverse economic activity figures have indicated high¬er-than-expected growth since the end of 2020. This suggests that the negative effects on output from recurring waves of COVID-19 have grown weaker and less long-lasting with subsequent outbreaks. Nevertheless, the third wave of the coro¬navirus, and to an even greater degree the previously mentioned roadblocks and disruptions to public order, likely led to a decline in GDP in the second quar¬ter compared to the first. Despite this, data from the monthly economic tracking indicator (ISE) for April and May surpassed expectations, and new sector-level measures of economic activity suggest that the negative impact of the pandemic on output continues to moderate, amid reduced restrictions on mobility and im¬provements in the pace of vaccination programs. Freight transportation registers (June) and unregulated energy demand (July), among other indicators, suggest a significant recovery following the roadblocks in May. Given the above, annual GDP growth in the second quarter is expected to have been around 17.3% (previously 15.8%), explained in large part by a low basis of comparison. The technical staff revised its growth projection for 2021 upward from 6% to 7.5%. This forecast, which comes with an unusually high degree of uncertain¬ty, assumes no additional disruptions to public order and that any new waves of COVID-19 will not have significant additional negative effects on economic activity. Recovery in international demand, price levels for some of Colombia’s export com¬modities, and remittances from workers abroad have all performed better than projected in the previous report. This dynamic is expected to continue to drive recovery in the national income over the rest of the year. Continued ample international liquidity, an acceleration in vacci¬nation programs, and low interest rates can also be ex¬pected to favor economic activity. Improved performance in the second quarter, which led to an upward growth revision for all components of spending, is expected to continue, with the economy returning to 2019 production levels at the end of 2021, earlier than estimated in the April report. This forecast continues to account for the short-term effects on aggregate demand of a tax reform package along the lines of what is currently being pro-posed by the national government. Given the above, the central forecast scenario in this report projects growth in 2021 of 7.5% and in 2022 of 3.1% (Graph 1.1). In this scenar¬io, economic activity would nonetheless remain below potential. The noted improvement in these projections comes with a high degree of uncertainty. Annual inflation increased more than expected in June (3.63%) as a result of changes in food prices, while growth in core inflation (1.87%) was similar to projections.

Recent data suggest that the technical staff’s appraisals of the condition and development of economic activity, inflation and the labor market have been in line with current trends, marked by a decline in demand and the persistence of ample excess productive capacity. A significant projected fall in output materialized in the second quarter, contributing to a decline in inflation below the 3% target and reflected in a significant deterioration of the labor market. A slow recovery in output and employment is expected to continue for the remainder of 2020 and into next year, alongside growing inflation that should remain below the target. The Colombian economy is likely to undergo a significant recession in 2020 (GDP contraction of 7.6%), though this may be less severe than projected in the previous report (-8.5%). Output is expected to have begun a slow recovery in the second half of this year, though it is not projected to return to pre-pandemic levels in 2021 amid significant global uncertainty. The output decline in the first half of 2020 was less severe than anticipated, thanks to an upward revision in first-quarter GDP and a smaller contraction in the second quarter (-15.5%) than had been projected (-16.5%). Available economic indicators suggest an annual decline in GDP in the third quarter of around 9%. No significant acceleration of COVID-19 cases that would imply a tightening of social distancing measures is presumed for the remainder of this year or in 2021. In that context, a gradual opening of the economy would be expected to continue, with supply in sectors that have been most affected by the pandemic recovering slowly as restrictions on economic activity continue to be relaxed. On the spending side, an improvement in consumer confidence, suppressed demand for goods and services, low interest rates, and higher expected levels of foreign demand should contribute to a recovery in output. A low base of comparison would also help explain the expected increase in GDP in 2021. Based on the conditions laid out above, economic growth in 2020 is expected to be between -9% and -6.5%, with a central value of -7.6%. Growth in 2021 is projected to be between 3% and 7%, with a central value of 4.6% (Graph 1.1). Upward revisions compared to the July report take into account a lower-than-expected fall in first-semester growth and a somewhat faster recovery in the third quarter in some sectors. The forecast intervals for 2020 and 2021 growth tightened somewhat but continue to reflect a high degree of uncertainty over theevolution of the pandemic, the easures required to deal with it, and their effects on global and domestic economic activity.