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Colombia Monetary Policy January 2022

Colombia: BanRep speeds up tightening of conditions in January

At its 28 January meeting, the Board of Directors of Colombia’s Central Bank (BanRep) voted to increase the benchmark interest rate by 100 basis points to 4.00% from 3.00%. The move marked the fourth consecutive rate hike since the tightening of conditions began in September 2021. While the decision to raise the rate was unanimous, the vote was once again split with regard to its size, with two of the seven board members voting for a 75 basis-point increase. The decision to increase the rate was widely expected by analysts, but the size of the increase took markets largely by surprise.

The decision was largely due to both headline and core inflation closing 2021 above expectations, continuing their upward trends. As a result, BanRep upgraded its year-end headline inflation projections to 4.3% and 3.4% for 2022 and 2023, respectively. As such, the Bank expects inflation to be above the upper bound of its 2.0%–4.0% target band this year. Additionally, high-frequency data shows that the economy continued to expand through November, with BanRep noting that activity “has recovered quickly from the effects of the pandemic and no longer requires the same degree of monetary stimulus that has been administered over the course of the Covid-19 crisis”.

The Bank did not provide hints on future policy moves in its communiqué, but it emphasized its commitment to keeping inflation at 3.0%. Our panelists are currently assessing the Bank’s latest decision.

Analysts at Credicorp Capital explained:

“While strong activity and a widening external deficit have been forces behind the tighter monetary adjustment (in fact, the output gap is now seen around zero along 2022), the rapid inflationary trend and its effect on inflation expectations remain as the main factor behind monetary policy decisions by a wide margin. […] Given the high uncertainty on inflation in the near term and considering that risks remain significantly skewed to the upside amid factors such as the strong increase in the minimum wage, below-par gasoline prices, soaring PPI and a weaker COP, we expect the repo rate to reach 6.00% this year, meaning a slightly restrictive monetary stance.”

They added:

“This rate adjustment is a clear message that the BanRep continues to act in line with the goal of price stability, despite the speculation in the market (especially last year) around a potential influence from the government as President Duque has named all current Board members. Thus, credibility remains strong, in line with our view.”

The next monetary policy meeting is scheduled for 31 March.

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