Colombia: Central Bank continues monetary easing in September
ut meets market expectations, follows a more divided vote: At its meeting on 30 September, the Board of Directors of the Central Bank of Colombia (Banrep) decided to reduce the policy interest rate by 50 basis points to 10.25%. The move, which mirrored July’s same-sized cut, had been largely priced in by markets and was once again not unanimous; three of the Board’s seven members preferred a 75 basis point cut.
Banrep aims to support the economy: Banrep’s decision was targeted at supporting the ongoing recovery in economic activity: Despite high GDP growth in Q2, the Bank noted that fixed investment remained low by pre-pandemic standards. A continued decrease in inflation also gave the Bank room to cut: Price pressures fell to 6.1% in August, undershooting market expectations. That said, persistent upside inflationary risks and sticky inflation expectations likely dissuaded a larger-sized cut.
More cuts likely by year-end: In its communiqué, Banrep provided no explicit forward guidance but underlined its commitment to “support a recovery of economic growth while maintaining the necessary prudence in light of persistent risks to the inflation outlook”; the Bank’s main priority is to drive inflation towards its 3.0% target by 2025. Our Consensus is for around 150 basis points of further cuts by year-end, though the spread remains large at 75–375 basis points.
The Bank’s next meeting is scheduled for 31 October.
Panelist insight: Analysts at Itaú Unibanco commented:
“The less contractionary global financial conditions, along with the expectation that the effect on inflation of the transporters’ strike will be mild, supporting a further fall in inflation and CPI expectations, we believe that the Board may be more willing to move to a larger cut at the October meeting. We see a year-end rate of 8.75%. Nevertheless, domestic fiscal risk may see a cautious approach prevail.”
Scotiabank Colpatria analysts were slightly more dovish:
“We revise our call for future interest rate moves, to a 50 bps rate cut in October, and a potential acceleration since December with a cut of 75 bps to close the year at a 9% rate, […] we think that waiting further to start to reduce the real rate could have a negative cost in the economic activity in the future. We still estimate the terminal rate to be around 5.50%, and it could be achieved in H2-2025.”