- BanRep produces a hawkish 150 bps hike as growth projections raised.
A HAWKISH HIKE
The Board of Colombia’s central bank (BanRep) increased the monetary policy rate by 150 bps to 9% on July 29th (chart 1), the highest level since January 2009. The decision was aligned with market consensus, and above the 100 bps hike expected by Scotiabank Economics. The decision came in a 6:1 vote, with one Board member voting for a 100 bps hike. The Board still sees strong economic activity, while inflation expectations deviated further from the target range. Projected 2022 GDP growth increased again, this time from 6.3% to 6.9%. The Board also affirmed that its stronger action will accelerate convergence of inflation to target.
Key features of the decision include:
- During the press conference, Governor Villar said that the data-dependent approach will continue. He emphasized that current actions are expected to facilitate the faster convergence of inflation to the target.
- The MoF, Jose Manuel Restrepo, highlighted that there was unanimity on the need to continue raising the rate as economic activity remains strong. He highlighted that consumer credit is growing above 20%. Additionally, he said that the member who voted for a 100 bps hike cited signals of weakening in the credit market and business sentiment that would harm the economic activity.
- Governor Villar said that the neutral rate has probably increased as international risk perceptions have deteriorated and the Federal Reserve is withdrawing monetary stimulus. However, he said, it is difficult to define how contractionary the monetary policy rate should be, but also noted that the central bank’s policy rate is nearing a level that should reduce inflation going forward.
- In the press conference, Governor Villar again emphasized that the central bank prefers that the currency continue to float according to market conditions. He rejected FX intervention as the USD COP is responding strongly to international trends. Moreover, none of the Board is proposing mechanisms to reduce FX volatility, and said that in the past such measures were targeted at international reserves but not a specific FX level.
All in all, BanRep delivered a 150 bps hike, again highlighting concerns about inflation expectations and emphasizing the strong economic activity performance. Governor Villar said that under current information, the central bank feels that it is closer to a rate that would accelerate convergence of inflation to the target. However, he also emphasized that the data-dependent approach will continue.
It is worth noting that in July’s meeting the economic staff revealed a fresh macroeconomic forecast to the Board, with an upside revision on the GDP growth. Further details will be provided on Monday (after 5 pm local time). We will revise our expected terminal rate, but for now anticipate an additional rate hike in September.
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