- Colombia: BanRep Survey: Inflation expectations moderated again in June
Closed US Treasury markets (for Juneteenth) and limited data and events overnight—outside US-China rapprochement developments—has markets trading quietly with a bit of a risk-off feel ahead of a busy ex-US week; shrugging of US-China diplomatic rapprochement.
US equity futures are little changed while European markets gapped a touch lower on the cautious risk tone and a weak end to Friday’s US session. European rates markets are on the backfoot (especially in the UK) and Treasury futures are near Friday’s low. Crude oil prices are a touch lower, copper is down 0.5%, and iron ore is up 0.5%. The USD is up against all major currencies with a loose underperformance of commodity/Asia EM FX; the MXN and CAD, are practically flat. US and Colombian markets are closed today.
Today’s highlight, amid tertiary data, is the BCCh’s decision at 18ET. Bar one submission that sees a 25bps cut, all economists surveyed by Bloomberg (including us) expect a rate hold from Chile’s central bank. This may very well be the bank’s last decision before the rate cutting cycle begins.
We project a 50bps cut in July, which you can read about in our latest Latam Weekly. In a nutshell “the BCCh will go into its rate decision on Monday with well-anchored inflation expectations among economists and traders (surveyed by the bank), and breakeven markets. The bank is not expected to make a rate adjustment, but guidance will likely have clear changes and new projections out on Tuesday that show a lower inflation forecast should reflect a rate path that anticipates over 100bps in cuts in Q3.”
On the topic of rate cuts, Colombia’s FinMin and BanRep board member Bonilla added a bit more colour to his view on rates late on Friday, saying that rate cuts will not come as fast as rate increases. He also said that rate cuts may be considered two or three months after the June meeting. We’ll get some more clues this week as to when BanRep could begin its easing cycle, with economic activity data and imports data out tomorrow and on Wednesday, respectively. The latest BanRep economists’ survey also showed another moderation in inflation expectations (see below). Today, however, Colombian markets are closed (again? yes, with envy).
We have a busy week ahead, on top of the BCCh’s decision, there’s rate decisions from Banxico and the BCB (hawkish and dovish holds, respectively), and Mexican mid-month CPI and retail sales. Chilean markets are closed on Wednesday.
Political developments, as always, are important to watch. Colombia’s regular legislative session is scheduled to end tomorrow (note that lawmakers have called a plenary for today), but the period will likely be extended and will see debate on the government’s social reforms continue. Chilean and Peruvian governments are also struggling with public disapproval amid health outbreaks (respiratory virus in Chile and dengue in Peru). In Mexico, a poll carried out for El Economista showed that (now) former head of Mexico City’s government, Claudia Sheinbaum, leads opinion polls for Morena presidential candidates with 33% against what is thought to be her main opponent, Marcelo Ebrard (former foreign affairs minister), at 21.4%.
—Juan Manuel Herrera
COLOMBIA: BANREP SURVEY: INFLATION EXPECTATIONS MODERATED AGAIN IN JUNE
Last Thursday, the Central Bank (BanRep) released its monthly survey of economic expectations. Inflation Expectations (IE) for the end of 2023 decreased once again, registering a decline of 0.17 percentage points compared to the previous survey. This decrease can be attributed to the downward trend in headline inflation observed in May, despite the announcements of upcoming gasoline price increases in the coming months. Currently, the expectations for December 2023 stand at 9.04% year-on-year. Meanwhile, one- and two-year inflation expectations continue to decline (chart 1). By the end of 2024, inflation is projected to reach 5.13% y/y, still above the central bank’s target.
Inflation for June is expected to be 0.37% m/m, leading to a continued gradual deceleration of headline inflation to 12.22% in June. At Scotiabank Colpatria Economics, we anticipate a slightly higher figure of 0.51% m/m (12.37% y/y), which is slightly above consensus. For the end of the year, our projection stands at 8.88%, followed by 4.38% by the end of 2024, slightly below the previous forecast.
In line with inflation expectations, the market consensus anticipates stability in the monetary policy rate at 13.25% at the June decision, which aligns with Scotiabank Colpatria Economics’ expectations. By the end of the year, the market consensus places the policy rate at 11.75% (50 basis points lower than our projection of 12.25%).
- Short-term inflation expectations. For June, the consensus is 0.37% m/m, which implies an inflation rate of 12.22% y/y (down from 12.36% in May). The survey responses exhibit a wider dispersion this time, with the lowest projection at -0.10% m/m and the highest at 0.59% m/m. Scotiabank Colpatria Economics expects a monthly inflation rate for May of +0.51% m/m and 12.37% y/y.
- Medium-term inflation expectations continued to improve. Inflation expectations for December 2023 decreased to 9.04% y/y, a decline of 0.17 percentage points compared to the previous month’s survey (table 1). This decline occurred despite new information regarding higher gasoline price increases for the rest of the year and an increased probability of the El Niño phenomenon. The inflation expectations for the one-year horizon are at 6.4% y/y, a decrease of 0.31 percentage points compared to the previous survey, while the two-year outlook decreased by 8 basis points to 4.21% y/y. Inflation expectations have declined for five consecutive months, which is a crucial factor supporting the call for rate stability by the central bank.
- Policy rate. The median expectation (chart 2) indicates a stable policy rate until the October meeting, where the first 75 basis points cut is expected. By the end of 2023, the policy rate is projected to reach 11.75%. Scotiabank Colpatria Economics also expects rate stability until October 2023, with the first 50 basis points cut anticipated, resulting in a year-end rate of 12.25%.
- FX. The projections for the USDCOP exchange rate for the end of 2023 averaged 4,250 pesos (350 pesos lower compared to the previous survey). For December 2024, the respondents, on average, expect the peso to settle at USDCOP 4,169 pesos. The USDCOP rate for the end of June is expected to be around 4,195 pesos.
—Sergio Olarte, Jackeline Piraján & Santiago Moreno
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