- BanRep delivered a dovish hike of 100bps to 10%, due to an expected slowdown in the economy.
Today, the Board of Colombia’s central bank (BanRep) increased the monetary policy rate by 100bps to 10%, below the market’s consensus and our expectation of 150bps. The vote was split 6 to 1, with one Board member voting for an even smaller hike of 50bps. Despite the upward revision to 2022 GDP growth projections, the Board’s projections for growth in 2023 were weaker. Governor Villar said the rate is already at a restrictive level, which would help moderate inflation in the future. It was made clear, however, that the deceleration in GDP growth is now more important to the BanRep’s reaction function. Our call is now for a final hike of 50bps in October's meeting, and a terminal rate for 2022 of 10.50%.
Some key features of the decision included:
- The staff increased their GDP growth forecast from 6.9% to 7.8% for 2022 but reduced the expectation for 2023 to 0.7% from 1.1%.
- During the press conference, Governor Villar said that the monetary policy rate is at a level that will lead to lower economic activity, which is aligned with lower inflation. This leads us to believe that the Board is preparing to enter a wait-and-see mode. Governor Villar said that higher rates will contribute to a future moderation in credit growth, which, in the case of consumer credit, is currently expanding at a pace of 23% y/y.
- Regarding the FX, Minister Ocampo and Governor Villar said that the COP depreciation is a part of an international trend. Villar said that the central bank has to permit the free-floating of the currency, and currently the Board is not considering any intervention.
- In the final remarks, Governor Villar said that 3% is the long-term inflation target. But he recognized that won't be achieved by 2023 as inflation is expected to decline gradually.
To summarize, BanRep delivered a 100bps hike, while signaling that the end of the hiking cycle is close. Governor Villar emphasized that the current rate level warrants lower inflation in the future, but also slower economic activity. That said, we think BanRep’s reaction function is being fine-tuned to place more weight on economic growth. We expect a final 50bps move during October’s meeting. It is worth noting that in October, the staff will publish a new Monetary Policy Report, which is an appropriate opportunity to affirm a pause.
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