Central Bank continues loosening cycle in June

At its meeting on 28 June, the Board of Directors of the Central Bank of Colombia (Banrep) decided to reduce the policy rate by 50 basis points to 11.25%. The decision, which mirrored April’s same-sized cut, was once again not unanimous: Two of the board’s seven members preferred a 75 basis point cut. The move had been priced in by markets.

The Central Bank's decision was influenced by a continued reduction in inflation, excluding food and regulated items, which fell to 6.1% in May. The Bank also highlighted a decrease in inflation expectations for 2024, which continued to move toward the 3.0% target. That said, Banrep noted that headline inflation remained elevated at April’s 7.2% in May—largely due to a faster-than-anticipated increase in food prices—and that tighter global financial conditions have prompted exchange rate depreciation; these factors likely dissuaded a larger-sized cut. Regarding activity, economic growth in the first quarter was stronger than the Bank had forecast, pointing toward a sustained recovery in activity, aided by the current monetary policy loosening cycle.

In its communiqué, Banrep provided no specific forward guidance but reaffirmed its commitment to drive inflation towards its target by 2025, while supporting the ongoing recovery in economic activity. Accordingly, our panelists have penciled in about 275 basis points of further rate cuts by year-end, though the spread remains wide, at 50–475 basis points worth of further reductions. The Bank’s next meeting is scheduled for 31 July.

Analysts at Itaú Unibanco commented: “We expect the disinflation process to advance gradually, justifying a cautious rate cut path. The La Niña phenomenon will be a risk for inflation, along with the expectation that the removal of subsidies should raise diesel prices in the second half of the year. […] We expect the Board to continue with the 50bp rate cut pace in the next meetings.” Goldman Sachs’ Santiago Tellez added: “Following today’s policy signals, our baseline scenario of cautious 50bp cuts in upcoming meetings remains unchanged. This path is consistent with policy signals that the Board is willing to accommodate further rate cuts of a continuous nature while minimizing the risk of unsettling the FX given the still volatile external backdrop and derailing the disinflation process. In our view, the challenging inflation backdrop itself creates a high hurdle for an imminent acceleration in the pace of cuts, and the ongoing recovery of activity lessens the urgency to do so.”

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