In a divided decision, BanRep continued with the 50bp rate cut pace to 10.25%. In contrast to previous meetings, three members favored an acceleration of the cycle to 75bps (2 members previously), while four members voted to maintain the cycle with cuts of 50bps. Following the decision, the one-year ex-ante real rate fell to 6.11% (using the monthly analyst survey; -41bps from the previous meeting in July), still reflecting a highly contractionary monetary policy (BanRep’s real neutral rate estimate of 2.4%). Governor Villar remarked that CPI has continued to fall, with downside surprises in food prices, as well as falling inflation expectations. On the other hand, activity indicators in 3Q24 suggest that a recovery trend continues. Despite the 50bp cut by the FED, risk premiums in the region have continued to increase, with Colombia more affected. Governor Villar signaled that upcoming decisions will be data dependent. The move to a more divided Board signals to us that if inflation and their expectations continue to show favorable signs, the moment for a change in the cycle’s pace may be soon upon us.
Recent data poses an upside bias to the technical staff's 1.8% GDP growth forecast for 2024.
Despite the drop in inflation, it remains high. Governor Villar highlighted that core inflation between July and August fell by 50 bps, the same amount by which rates were cut. Moreover, Villar highlighted that when analysts' CPI expectations, the one-year and 2025 outlook are close to 4%. However, break-even inflation expectations in the public debt market suggest that the one-year and 2025 inflation will be very close to the 3% target. Villar suggested that the higher analyst CPI expectation may be associated with a swifter cutting cycle adopted.
BanRep is close to this year's reserve accumulation target. Governor Villar signaled that during the current year, the purchase of dollars for reserve accumulation has exceeded USD 1.3 billion. The goal set by the bank was USD 1.5 billion. Villar noted that the Board will evaluate the strategy ahead once the USD 1.5 billion target is reached.
Our take: The less contractionary global financial conditions, along with the expectation that the effect on inflation of the transporters' strike will be mild, supporting a further fall in inflation and CPI expectations, we believe that the Board may be more willing to move to a larger cut at the October meeting. We see a yearend rate of 8.75%. Nevertheless, domestic fiscal risk may see a cautious approach prevail. The minutes of the meeting will be released on October 3. Leonardo Villar was renewed as Governor of the board for four more years from January 2025.
