Central Bank kicks off monetary policy easing cycle in September

First rate cut in over four years: On 25 September, the Monetary Board of the Central Bank of Guatemala (Banguat) unanimously decided to cut the key policy rate by 25 basis points to 4.75%. The move, which followed over ten consecutive holds since mid-2023, marked the first rate reduction since June 2020.

Softer price pressures motivate cut: Banguat was motivated by a combination of easing inflation and easing upside risks to inflation: Price pressures dropped to a 30-month low of 3.1% in August, moving closer to the lower limit of its 3.0–5.0% target range, and the Bank noted that upside inflationary risks for 2024–2025 had eased. Additionally, the Fed’s recent decision to embark on its monetary policy easing cycle added further impetus to the move, as Banguat sought to minimize exchange rate fluctuations. Regarding economic growth, the Bank noted that activity continued to expand at a pace that is consistent with its GDP growth forecast for 2024 and 2025.

Easing cycle to continue: In its communiqué, Banguat did not include explicit forward guidance but reiterated its commitment to anchor inflation within the target range. Our panelists see scope for around 50 basis points of further reductions by end-2024. Commodity price spikes driving faster-than-forecast inflation are an upside risk, while the timing and pace of monetary easing in the U.S. are key to track. The next monetary policy meeting is scheduled for 27 November.

Panelist insight: Anaysts at the EIU commented: “We think that Banguat will continue to reduce rates over the rest of 2024 and in 2025, taking the policy rate to a terminal level of 2.75% by end-2026. Guatemala's low level of financial intermediation reduces the influence of interest-rate pass-through, although better local and global financing conditions will nonetheless support economic performance.”

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