- BanRep is highly conscious of upside risks in inflation and called for prudence in minimum wage negotiations
Colombia’s central bank released the minutes to its October monetary policy meeting on Friday, November 3rd. BanRep’s board recognized that Colombia faces upside risks in inflation. However, this time the minutes also include a reference to downside risks in economic activity. Either way, the board said that inflation upside risks are predominant and have been transmitted to inflation expectations. For these reasons, the board’s majority voted for rate stability. The two members that voted for a 25bps rate cut weighed more the downside risks in the economy since high rates are impacting investment projects. The minutes also included a unanimous request of prudence in minimum wage negotiations, highlighting that inflation reduction will continue contributing to increases in the real rate.
October’s monetary policy decision had the same split vote observed in September; five members voted for rate stability and two members for a 25bps cut. Minutes reflected that, for both groups, inflation risks are a source of concern, however the minority group weighs more negative risks on the economic growth and employment.
The minutes leave the door open to having a potential rate cut in December if headline and core inflation continue their decline. However, we think a strong signal for the board will be an evolution on minimum wage negotiations pointing to a prudent increase. Our base case scenario is a rate cut of 50 bps, however the bias is towards having a later start in the easing cycle but probably with a stronger move.
Further details about BanRep’s minutes:
- The board identified three risks on inflation: the impact of the “El Niño” weather phenomenon, minimum wage increases and geopolitical risks.
- The majority group that voted for rate stability emphasized that still high inflation expectations play against the contractionary stance of the monetary policy rate, which makes even more difficult inflation convergence to the 3% target. That said, rate stability contributes to reduce inflation expectations and protect BanRep’s credibility.
- The majority group said that the recent interest rate reduction on market’s time deposits reduces the urgency for reducing the monetary policy rate. The board said that reduction in deposit rates demonstrates better liquidity in the financial system, probably due to recent liquidity facilities to three and six months provided by BanRep. We instead think improvements in the financial market liquidity was a result of a less aggressive implementation of regulations of NSFR for local banks announced in August by Superintendencia Financiera.
- The minority, who voted for a 25 bps cut, express again concern for the domestic demand, especially regarding investment. They highlighted that reduction in the external and fiscal deficit has contributed to reduce macro vulnerabilities.
- It is interesting to note that the request for having a prudent negotiation of minimum wage increase was unanimous. That also means that the Minister of Finance agrees that the minimum wage should not be increased well above inflation projected for the year end. According to regular history minimum wage is set between 1 and 1.5 percentage points above expected year end inflation, which points that for 2024 this increment shouldn’t exceed 11%.
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