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Colombia Monetary Policy July 2022

Colombia: BanRep raises policy rate 150 basis points in June, matching market expectations

At its 29 July meeting, the Board of Directors of Colombia’s Central Bank (BanRep) voted to increase the benchmark interest rate by 150 basis points, from 7.50% to 9.00%. The move, which was expected by the market, marked the eight consecutive rate hike and amounted to a cumulative 725 basis points of increases since the current tightening cycle began in September 2021. Six board members voted for the decision, while one member voted for a smaller 100 basis points increase.

The move was driven by rising inflation and inflation expectations. Headline inflation hit 9.7% in June, the highest since 2000. Moreover, price pressures appear to be broadening, with core inflation also rising. As a result of these developments, inflation expectations for the end of this year rose to 9.2% in July (June: 8.6%) and for the end of next year to 5.2% (June: 4.7%)—slightly above 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 it necessary to raise rates. Moreover, while inflation has in part been caused by external supply shocks—which are outside of the central bank’s control—BanRep argued that the impressive economic performance in H1 was due to excess demand, giving it further motive to raise rates.

The Bank did not provide explicit forward guidance, instead taking a wait-and-see approach. It stated that it would take decisions depending on “new information available.” 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 one more 50 basis point hike this year at BanRep’s next meeting on 30 September.

Analysts at Credicorp Capital commented on the outlook for monetary policy:

“Governor Villar […] affirmed that […] future decisions will be taken considering the new available information. Accordingly, the BanRep has left the door open for further rate hikes. In any case, Mr. Villar said that the current information suggests that future moves could be of lower magnitude while affirming that the monetary policy is now closer to the required levels to achieve the goal of inflation convergence ahead. All this is in line with our current view of a terminal rate of 10% in the upcoming months amid a data-dependent stance, though (market consensus at 9%).”

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