The Central Bank’s board hiked rates by 25bps to 13.25%, above our stay-on-hold call. The Board was split, reflecting the still-high inflation despite a policy rate far above neutral levels. Four board members favored the 25bp hike, one member preferred a larger 50bps increase, while two members voted to keep rates on hold. In the press conference, Governor Villar highlighted that future monetary policy decisions will be data dependent. Villar affirmed that it is not possible to say the tightening cycle concluded, but if going forward there is clear evidence of falling inflation and adjusting CPI expectations, it may be possible to assume the terminal rate has been reached. The next meeting will be at the end of June, giving the Board several inflation and survey prints to evaluate the evolution of the economy. Following the hike, the one-year ex-ante real rate increased to 6.25% (using the monthly analyst survey; +45bps from the previous meeting).
Governor Villar stressed concern over services inflation. Villar highlighted that inflation expectations continue to trend down, while falling food prices and a stronger COP will aid the headline correction ahead. Nevertheless, services inflation is still a concern as core inflation continues to trend up.
Economic activity has been resilient. Due to a slower than expected deceleration of the economy, the technical staff revised the 2023 GDP growth forecast up by 20bps to 1.0% (7.5% in 2022). However, Governor Villar highlighted that the economy is showing signs of slowing.
We believe the tightening cycle likely ended, in line with our call that inflation peaked in March. However, the Board is leaving the decision dependent on incoming data that maintains the risk of additional hikes in the short-term. Market volatility due to renewed political uncertainty will likely also play a key role in upcoming decisions. The probability of rate cuts unfolding this year is falling (our current call considers a 12% yearend rate).
Joao Pedro Resende