Colombia: BanRep delivers first rate hike in September; begins normalization of policy
September 30, 2021
At its 30 September meeting, the Board of Directors of Colombia’s Central Bank (BanRep) decided to hike the benchmark interest rate by 25 basis points to 2.00% from the record low of 1.75%—where it had been since September last year. The decision to start policy normalization was unanimous and widely expected by analysts. However, the vote was split with regard to the rate, with three of the seven board members voting for a 50 basis-point hike.
The Bank’s decision came against a backdrop of increasing inflationary pressures through August, and an improved growth outlook for both this year and 2022, with forecasts raised to 8.6% and 3.9%, respectively. Regarding prices, the Bank accounted for upside risks in the short term, prompting an upward revision of inflation expectations for 2021 and 2022 to 4.5% and 3.5%, respectively. While BanRep acknowledged risks to the economic growth outlook—namely pandemic-related uncertainty—it deemed a rate hike necessary in order to avoid inflation remaining above target for a prolonged period.
Looking ahead, the Bank did not provide hints on future policy moves in its communiqué. That said, if inflation continues its upward trend in the remainder of the year, the Bank is likely to continue hiking the benchmark interest rate. As such, most of our panelists have penciled in another increase of between 25 and 50 basis points before the year ends.
Sergio Armella, analyst at Goldman Sachs, said:
“In our assessment the MPC will continue to normalize policy in the coming meetings and the bar to accelerate the pace to 50bp is likely relatively low. Reducing the degree of monetary accommodation is warranted given recent higher than expected inflation prints, deteriorating headline and core inflation and currency expectations, and a large and widening current account deficit. In addition, recent hawkish regional and global monetary developments, high risk-premia given the challenging fiscal picture, sovereign rating downgrades, and an uncertain political and policy backdrop also justify the central bank’s move towards monetary policy normalization. At this stage we are anticipating the policy rate reaching 2.75%-3.00% by the end of 2021, and 3.50%-4.00% by end-2022.”
The next monetary policy meeting is scheduled for 29 October.
Author: Marta Casanovas , Junior Economist