The Board of Colombia’s Central Bank (BanRep) kept the policy rate at 13.25%, pausing the hiking cycle that began in September 2021 and after 11.50 pps of increases. The decision was unanimous, and the board emphasized the data-dependent approach for forthcoming meetings. During the press conference, Governor Villar highlighted that the monetary policy rate remains contractionary and is consistent with the appropriate level to achieve the inflation target.
Governor Villar and Minister Bonilla highlighted that the uncertainty regarding the inflation outlook remains given potential events such as El Niño weather phenomenon. They said the increase in gasoline prices due to the fuel subsidy reduction will make inflation decrease at a slower rate. Both affirmed that future rate moves would strongly depend on inflation developments. Also, they remarked that a slowdown in economic activity is necessary to achieve long-term sustainability.
Communications during the press conference signalled that the hiking cycle has ended, with no signals of leaving the door open for further hikes. However, before starting the easing cycle, Governor Villar said observing a decrease in core inflation is crucial. Given that, we affirm our expectation of a rate cut in October; by this time, we expect lower inflation expectations and a more evident downward trend in core prices.
Key insights about today’s decision:
- In the communique, the board highlighted that headline inflation has started to slow down, but remains well above the central bank’s target. However, they also remarked that inflation expectations have decreased, which is a positive development with the two-year-ahead expectations now closer to the ceiling of the target range (of 2% to 4%).
- The communique also highlighted that the slowdown in economic activity is reflected in the narrowing of the external deficit.
- Furthermore, the board highlighted the appreciation of the currency which occurred despite the elevated international volatility.
- During the press conference, Governor Villar said that the real rate should be maintained in contractionary territory if inflation, especially core, remains above target. However, he said that the nominal rate could go down if inflation decreases. But again, he emphasized that seeing a decrease in core inflation is key before starting the easing cycle.
- Finance Minister Bonilla said that the approach should remain cautious. Furthermore, he emphasized that it is necessary to see inflation slowing down further before discussing rate cuts.
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