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Colombia Monetary Policy September 2022

Colombia: BanRep raises policy rate 100 basis points in September

At its 29 September meeting, the Board of Directors of Colombia’s Central Bank (BanRep) increased the benchmark interest rate by 100 basis points, from 9.00% to 10.00%. The move marked the ninth consecutive rate hike and amounted to a cumulative 825 basis points of increases since the current tightening cycle began in September 2021. Six board members voted for the decision, while one member wanted a 50 basis point increase.

The move was driven by rising inflation and inflation expectations. Headline inflation hit a higher-than-expected 10.8% in August, the highest since 1999. Moreover, price pressures appear to be broadening, with core inflation also rising. As a result, inflation expectations for the end of next year rose to 6.3% (August: 5.5%)—above the upper range of the 2.0–4.0% inflation target. In order to avoid medium-term deviations from the target band and a potential de-anchoring of inflation expectations, BanRep considered it necessary to raise rates. Moreover, while inflation has in part been stoked by external supply shocks—which are outside of the Bank’s control—BanRep highlighted the “dynamic” performance of the economy in Q2 and raised its 2022 growth forecast to 7.8% from 6.9%. Robust economic activity will have fueled price pressures, giving BanRep further motive to hike.

In its release, the Bank did not provide explicit forward guidance. It stated that it would take decisions depending on “new information available” and that it would continue its “monetary policy adjustment process” until inflation is set to converge to 3.0% in the medium run. As a result, our panelists project further hikes at BanRep’s next meeting on 28 October—with the policy rate coming close to reaching its terminal rate.

Analysts at Scotiabank Colpatria commented on the outlook:

“Our take is that now the economic Activity performance is gaining relevance in the reaction function of the central bank. That said for now we affirm our expectations of a move of 50 bp on October 28, which probably would take us to a terminal rate at 10.50%. further hikes will depend on strong upside Inflation surprises but also if the economy remains growing well above the trend, that for now is not our base case scenario.”

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