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Colombia Monetary Policy September 2023

Colombia: BanRep leaves policy rate unchanged in September

At its 29 September meeting, Colombia’s Central Bank (BanRep) decided to keep the benchmark interest rate unchanged at 13.25%. Five board members backed the decision, while two called for a cut of 25 basis points. The decision was expected by the market and marked the third pause in a row following a cumulative 1,150 basis point increase since September 2021.

The decision came despite pressure from President Gustavo Petro and his finance minister to cut rates. In justifying its decision, the BanRep noted that although economic activity had decelerated, it remained above the level that would have been expected based on trends before the pandemic. This suggests that the economy may be operating above capacity, potentially one of the reasons why Colombia has the highest inflation rate among all inflation-targeting countries in the Americas. This relatively high inflation rate, plus a recent rise in inflation expectations, pushed the BanRep not to follow neighboring central banks in cutting rates.

Given the slowing economy and inflation, most of our panelists project that the Bank has reached the end of its hiking cycle and will begin lowering rates in Q4. That said, there are some significant upside risks. Firstly, core inflation could be more persistent than expected due to the ubiquity of salary indexation. Secondly, headline inflation could rise more than expected due to the recent removal of fuel subsidies. Thirdly, food prices could rise more than projected due to El Niño.

The next monetary policy meeting is scheduled for 31 October.

On the outlook, analysts at Scotiabank Colpatria said:

“We maintain our call for a rate cut in December, which strongly depends on further inflation progress. In that sense we highlighted that minimum wage negotiation [taking place in Q4] is critical for the board, the risk of having a minimum wage increase [for 2024] set well above inflation could make inflation reduction slower. That is why we think Banrep could prefer to wait and see what happens with the minimum wage before starting the easing cycle.”

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