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Colombia Monetary Policy June 2022

Colombia: BanRep continues to raise policy rate in June

At its 30 June meeting, the Board of Directors of Colombia’s Central Bank (BanRep) voted to increase the benchmark interest rate by 150 basis points, from 6.00% to 7.50%. The move, which was expected by the market, marked the seventh consecutive rate hike, amounting to a cumulative 575 basis points of increases since the current tightening cycle began in September 2021. The decision was unanimous.

The move was driven by rising inflation and inflation expectations. Headline inflation hit 9.1% in May, the highest since 2000. Moreover, price pressures appear to broadening, with core inflation also rising. As a result of these developments, inflation expectations for the end of this year rose to 8.6% in June (May: 8.2%) and for the end of next year to 4.7% (May: 4.6%)—slightly below the upper range of the 3.0–5.0% inflation target. As a result, in order to avoid medium-term deviations from the target band and a potential de-anchoring of inflation expectations, BanRep felt compelled to raise rates. Meanwhile, better-than-expected growth figures for Q1 gave the Bank leeway to raise rates without causing a sharp slowdown in economic activity.

The Bank did not provide explicit forward guidance, instead taking a wait-and-see approach. It stated that it would take decisions depending on “the information available at a given moment in time.” The Bank stated that interest rates were not yet high enough to cause inflation to converge to its target in the medium run. As a result, our panelists project another 125bp of tightening by the end of this year at the Bank’s next two meetings on 29 July and 30 September.

Analysts at Scotiabank Colpatria commented on the outlook for monetary policy:

“All in all, the minutes revealed a strong concern regarding the inflation expectations dynamic, while in terms of economic activity, the board still sees a robust performance. As the board mentioned, uncertainty remains high, but from our point of view, the hiking cycle would extend more than expected and the terminal rate would exceed our current forecast of 8.50%.”

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