Money in Colombia

Colombia - Money

BanRep raises policy rate 100 basis points in October

At its 28 October meeting, the board of directors of Colombia’s Central Bank (BanRep) increased the benchmark interest rate by 100 basis points, from 10.00% to 11.00%. The move marked the 10th consecutive rate hike and amounted to a cumulative 925 basis points of increases since the current tightening cycle began in September 2021. The decision was unanimous.

Both headline and core inflation continued to rise in September, with the former reaching the highest rate since 1999. Resultingly, inflation expectations for the end of next year rose to 6.7% in October (September: 6.3%). With the economy continuing to perform strongly, this pushed the BanRep to hike rates to ensure inflation converges to its 2.0–4.0% target band in the medium run.

The unanimity of the October decision—in contrast to September, when the finance minister is believed to have dissented—seems designed to reassure investors that the country’s macroeconomic policy is sound. This should support the peso, which fell to record lows in October on concerns regarding the president’s policy agenda.

In its release, the Bank did not provide explicit forward guidance. It stated that it believes monetary policy is now contractionary, meaning the eventual convergence of inflation to the midpoint of the target band “is expected to be guaranteed”. This suggests that the central bank is close to the end of its hiking cycle. The BanRep’s next meeting is scheduled for 25 November.

Analysts at Scotiabank Colpatria commented on the outlook:

“All in all, BanRep showed us a hawkish response to the recent market volatility. The data-dependent approach remains, as the governor said the board wants to see incoming information during November ahead of December’s meeting. Our expectation now is of a 50 bps hike in December but again showing a data-dependent mode.”

Analysts at Credicorp said:

“We are maintaining our estimate of a terminal rate of 12% for the cycle and highlight that the decision in Dec-22 will depend not only on the evolution of inflation and its expectations in Oct-22 and Nov-22 but also on the behavior of the markets.”

Our panel forecasts the policy rate to end 2023 at 10.23% and 2024 at 7.72%.