BanRep raises policy rate 75 basis points in January; two board members dissent
At its 27 January meeting, the board of directors of Colombia’s Central Bank (BanRep) increased the benchmark interest rate by 75 basis points, from 12.00% to 12.75%, undershooting market expectations. The move marked the 12th consecutive rate hike and amounted to a cumulative 1,100 basis points of increases since the current tightening cycle began in September 2021. However, the decision was not unanimous: Two board members voted for a 25 basis point hike.
Both headline and core inflation continued to rise and exceed market expectations in December, with the former reaching the highest rate since 1999. According to the latest survey released by Fedesarrollo on 23 January, inflation expectations for the end of this year rose to 8.9% compared to 7.6% in the prior survey. This pushed BanRep to hike rates to ensure inflation converges to its 2.0–4.0% target band in the medium run.
That said, the smaller size of the hike and the lack of unanimity reflected growing concern regarding the impact of recent rate hikes on economic activity.
In its press release, BanRep struck a dovish tone compared to last month. It stated that interest rates are nearly high enough to ensure that inflation converges to the mid-point of the target band in the medium run. This suggests that the Central Bank is close to the end of its hiking cycle. BanRep’s next meeting is scheduled for 31 March. At this next meeting, eight of our panelists expect a 25 basis point hike, three expect a 75 basis point hike, two expect a 50 basis point hike, and one panelist expects no rate hike.
Analysts at Scotiabank Colpatria commented on the outlook:
“Given the new information, we expect a final 25-bps hike in the March meeting. Inflation is expected to stabilize in Q1-2023, allowing the central bank to continue slowing down the hiking cycle pace and triggering a wait-and-see mode.”
Meanwhile, analysts at Credicorp said:
“In short, we expect a 50 basis point hike in the next monetary policy meeting, without ruling out further adjustments. All will depend on the evolution of inflation in H1 2023, given its current upward bias, principally because of factors such as the reintroduction of taxes on the consumption of services, the adjustment of prices for passenger flights, unexpected changes in petroleum prices and tariffs on clothed goods, among others.”
Colombia 10-Year Bond Yield (%, eop) Data
|10-Year Bond Yield (%, eop)||6.74||7.02||6.42||5.76||8.46|