The Central Bank’s board delivered a unanimous 25bp rate hike to 13.0%, in line with the Bloomberg consensus while below our 50bp call. The decision is a moderation from the 75bp hike in the previous meeting. Both the press release communicating the decision and the press conference (attended by Governor Villar and Finance Minister Ocampo) signaled that the Board is open to further hikes if inflation surprises to the upside, but also suggested the cycle may have concluded if headline inflation peaked in February and food inflation continues to fall. Hence, the March CPI print, to be released next week, will be key in determining the next policy move. Following the hike, the one-year ex-ante real rate increased to 5.8% (using the monthly analyst survey; +80bps from the previous meeting).
The Board overemphasizes certain favorable inflation dynamics. The Board highlighted that the marginal increase of annual headline inflation from December to February (8bps on average per month) was milder than the increases recorded during 2022 (63bps during 2022) to convey that inflation is peaking. Governor Villar also noted that they expect core inflation to continue to rise in coming months as the effects of monetary policy act with a lag (given widespread indexation). The fall in the one-year inflation expectation from 7.7% in December-22 to 7.2% in February (7.3% in January), and the drop in the two-year expectation to 4.0% (4.5% in December and 4.1% in January) were highlighted. The focus on the gradual fall of inflation expectations shows the Board is keen on signaling monetary policy is working. Yet, with medium term inflation expectations well above the 3% target, we believe easing of monetary policy in the near-term is not a consideration.
A growth slowdown in 2023, but forecast revised up. The technical staff revised its 2023 GDP growth to 0.8% (0.2% previously, Itaú: 0.6%). Overall, the slowdown comes from tighter financial conditions and a weak global economy. Governor Villar remarked that the economy was stronger than expected during the last quarter of 2022 and in the first month of 2023. The Board views limited effects on Colombia of the banking turmoil in advanced economies.
The tightening cycle likely ended or is near to its end, with the next move heavily data-dependent. While we have a terminal rate call of 13.25%, if inflation falls in May (we estimate a steady 13.3%) and inflation expectations continue to trend down, risks tilt towards a pause at the next meeting (April 28). The meeting minutes will be published on Monday April 3.
Joao Pedro Resende