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Colombia Monetary Policy July 2021

Colombia: BanRep holds rates steady in July but signals end to current monetary policy cycle

At its 30 July meeting, the Board of Directors of Colombia’s Central Bank (BanRep) maintained the benchmark interest rate at its record low of 1.75%. However, the decision, which was widely expected by market analysts, was not unanimous—unlike in the previous meeting—with two out of the seven board members voting for a 25 basis-point hike.

The decision to hold was fueled by signs of an ongoing recovery and came despite concerns of sticky inflation. Available indicators suggest that economic conditions continued to improve in Q2, prompting the Bank to upgrade its growth outlook for 2021 to 7.5% from 6.5%. However, the latest unemployment data hints at ongoing slack in the economy, while the spread of new Covid-19 variants clouds the outlook. On the price front, high inflation readings in May and June, coupled with gradually narrowing excess capacity, raised concerns with regard to the outlook, amid worries of persistent inflationary pressures.

Looking ahead, the Bank’s communiqué struck a more hawkish tone. Notably, in light of its upward revision to its 2021 GDP forecast and building price pressures, the Central Bank stressed that “the space available to maintain current levels of monetary stimulus is closing”. As such, the majority of our panelists expect the Central Bank to increase the benchmark interest rate by 25–75 basis points by year-end.

Commenting on the monetary policy outlook, Alberto Ramos, economist at Goldman Sachs, said:

“In our assessment, a gradual reduction of the degree of monetary accommodation is warranted. […] At this stage we are anticipating policy rate liftoff in the very near term, with at least two 25 basis-point rate hikes before the end of 2021, and with the policy rate reaching 3.50% by end-2022.”

Daniel Velandia and Camilo Durán, analysts at Credicorp Capital, also see rate hikes in the short term:

“The explicit (and implicit) signals sent by the BanRep, along with recent growth and inflation trends, makes us change our view on rates, so we are now expecting three 25 basis-point increases this year, in the Sep-21, Oct-21 and Dec-21 meetings (vs the beginning of the cycle in Jan-22 previously), while we are increasing slightly our projection of the terminal rate from 3.50% to 3.75% in 2022.”

The next monetary policy meeting is scheduled for 30 August.

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