Latam Daily: BanRep Cut Preview, Gloomy Chilean Jobs Data

• Colombia: Monetary Policy Preview—July meeting is one of the last chances to cut in 2025

• Chile: The labour market shows no improvement, and the unemployment rate remains at 8.9% in June

COLOMBIA: MONETARY POLICY PREVIEW—JULY MEETING IS ONE OF THE LAST CHANCES TO CUT IN 2025

Today, BanRep will hold its fifth monetary policy meeting of 2025. The consensus among economists, including Scotiabank Colpatria, expects a 25 basis point cut to 9%. This expectation is based on recent downward inflation surprises and a more moderate market reaction to fiscal developments. However, a potential cut in July is unlikely to signal a consistent easing cycle in the coming months. Fiscal risks, uncertainty surrounding the political decision on the minimum wage, and a potential rebound in inflation during the second half of the year could prompt the Board to adopt a cautious stance, limiting further rate cuts.

In June, we saw how the outlook could shift even a day before the meeting. On June 27^th, macroeconomic conditions supported a rate cut. However, just before the meeting, credit rating downgrades by Moody’s and S&P weighed against easing. A similar pattern appears to be unfolding this time, with recent government announcements undermining the credibility of the fiscal adjustment.

The expectation of a 25 basis point cut is reasonable given the following context: June inflation came in below market expectations at 4.82% year-over-year; inflation expectations remain relatively stable; markets have not reacted adversely to fiscal announcements; and fears of a trade war have eased. However, in the very short term, we cannot rule out the possibility that the rate will remain at 9.25%. The Board has repeatedly emphasized their fears on market deterioration due to fiscal noise. The exchange rate has depreciated by nearly 3% since the last BanRep meeting—most of this movement occurring in the past week—and we believe it could adjust to around COP 4,250, a level more aligned with fundamentals, which would add concerns for some board members. Additionally, the recently published 2026 National General Budget (presented on July 29^th) shows a significant deviation from the projections in the Medium-Term Fiscal Framework (MTFF), which may raise concerns among more cautious Board members.

Our current monetary policy forecast includes 25 basis point cuts in both the July and September meetings. However, there is a risk that rates could remain stable in September and for the rest of the year if inflation rebounds in upcoming readings due to base effects. We expect the interest rate to end the year between 8.75% and 9%, with cuts potentially resuming in Q1 2026, aiming for a rate of 7.50% by the end of 2026.

Key points about BanRep meeting:

• Inflation has fallen more than expected in the last two readings (May and June). Annual inflation fell to 4.82% in June, while inflation excluding food dropped below 5% for the first time since January 2022. The observed data provide room for a nominal interest rate cut, while maintaining restrictive conditions in real terms. However, for the remainder of the year, we expect inflation to rebound and reach 5.17% by the end of 2025, which lowers the likelihood of further cuts in upcoming meetings.

• The uncertainty associated with the minimum wage increase for 2026 poses a risk to inflation’s convergence to the 3% target. Although the discussion is still several months away, the Board highlighted in its previous meeting the risk associated with salary increases significantly above year-end inflation, as has been evident in previous years. In fact during July, president Petro talked about a significant increase in the minimum wage as his legacy in the last year of his government.

• Economic activity continues to show positive signs of recovery. In May, economic activity showed a 2.81% y/y increase and a 2.7% increase in its seasonally adjusted series. Household consumption has shown more favourable dynamics, driving much of the recovery, which implies less concern on this front for the Board, and expectations have been progressively adjusted upward.

• The government presented the 2026 Budget Proposal to Congress, with upward spending revisions and an overly optimistic outlook on revenue, suggesting continued fiscal pressures. The main characteristic of this plan is the significant deviation from the forecast presented in the Medium-Term Fiscal Framework (MTFF). Primary spending is projected to increase by 18.2% in COP terms (from 1.4% to 2% of GDP), while estimated revenues from a new tax reform have also been revised upward to COP 26.3 trillion (1.4% of GDP), compared to the COP 19 trillion estimated in the 2025 MTFF. The calm in local assets is fragile, and concerns about the fiscal situation may worsen if the government’s plans fail to materialize.

• The July meeting will be accompanied by an update of macroeconomic projections by the central bank’s technical staff. BanRep revealed an upward revision to its economic growth projection, from 2.6% projected in April to 2.7%. Inflation projected in its previous report is 4.4% for 2025 and 3% for 2026, which is lower than the 4.79% and 3.79% projected by the analyst consensus. In this update, it will be important to assess projected real interest rates, which currently stand at 2.7% for 2025 and 3.0% for 2026.

—Jackeline Piraján, Daniela Silva

CHILE: THE LABOUR MARKET SHOWS NO IMPROVEMENT, AND THE UNEMPLOYMENT RATE REMAINS AT 8.9% IN JUNE

• We project that the quarter ending in July would have the first year-over-year total job losses since the pandemic

On Wednesday, July 30^th, the INE released the unemployment rate for the quarter ending in June, which remained at 8.9% (chart 1), explained by a 0.3% drop in the labour force compared to the previous moving quarter (-33k) and a 0.3% drop in employment (-25k). As a result, 33k jobs were lost during the first half of 2025, the highest figure since the pandemic. The labour market remains weak, and if no improvement occurs, July could see the first year-on-year job losses since the pandemic began.

Zero year-over-year total job creation in June, driven by a further destruction of formal employment. Within formal employment, there is a rise in private salaried employment, but a significant decline in self-employment. Indeed, 15k private salaried jobs were created (chart 2), primarily in education and other services, but 35k own account jobs were destroyed, concentrated in the commerce and construction sectors, which showed some shift toward salaried employment. In the year-over-year comparison, 208k informal jobs were destroyed, which for now has been offset by the creation of 208k formal jobs. However, a persistent weakness in formal employment is observed, with destruction now reaching three consecutive moving quarters.

We anticipate that the employment figure for the quarter ending in July would report the first year-over-year job losses since the pandemic. Under a conservative scenario, where a drop of 65k jobs is realized in the quarter ending in July (similar to what was seen last year), this would represent the first year-over-year drop in total employment not seen since April 2021. This does not appear to be a pessimistic scenario, given that employment dynamics this year have been similar, or even worse, than those observed in 2024.

—Aníbal Alarcón