The Central Bank’s board held rates at 13.25%, in a 5-2 split decision, with two of the seven members voting in favor of a 25bp cut for a second consecutive meeting. Following the decision, the one-year ex-ante real rate sits at 7.51% (using the monthly analyst survey; +4bps from the previous meeting in September), consolidating the contractionary stance of monetary policy. The messages from Governor Villar and Finance Minister Bonilla at the press conference present different points of view. The former remained in a conservative camp, highlighting that inflation is still too high and clearly above the target, while uncertainty in the external financial conditions have been increasing. Villar also remarked that the majority of the board believes that starting an easing cycle is not yet convenient, not until the disinflation process consolidates. In contrast, the Minister of Finance and voting member of BanRep's board, voted to begin the easing cycle, as in the September meeting, highlighting that the decision was not unanimous and remarking that high interest rates are an obstacle for the economic recovery. In his view, the Colombian economy should not be compared with peers that did not freeze fuel prices.
Growth was revised up… Villar confirmed that the technical staff expects the economy to grow by 0.4% YoY for the 3Q, while for 2023 expects an economic growth of 1.2% (0.9% previously expected). Villar recognized that the economy has slowed, with clear signs of weakening in some sectors of the economy, but sectors such as services still have traction. Villar also highlighted that the economy is above the pre-pandemic trend amid a low unemployment rate.
… as inflation was revised up. While the exact inflation forecasts will be released in the monetary policy report later this week, Villar noted that BanRep’s technical staff revised 2023 yearend CPI up from 8.96% to a level below 10% (Itaú 9.5%). Additionally, the staff expects CPI to return to the inflation target in 2024.
CAD deficit expected to narrow. Villar remarked that a significant adjustment in the CAD deficit has been observed in 2023, where BanRep estimates a year-end CAD deficit of 3.4% (6.2% in 2022). The Governor highlighted that even though a lower CAD deficit makes the economy less vulnerable to external shocks, it is important to continue to track the geopolitical conditions, given that higher oil prices had mixed effects in the economy.
Liquidity constraints have been easing. Villar believed the liquidity issues in the local financial system have been resolved, supported by measures adopted by the Central Bank and the Financial Market Regulator. Therefore, Villar remarked that additional measures would not be needed. Meanwhile, loan dynamics continue to slow as expected to 6% from a 23% peak last year, with an increase in consumption NPL close to 6%.
Easing likely to be pushed forward. The odds of starting the easing cycle later this year have fallen, as BanRep's technical staff revised growth higher for this year pointing to a more gradual deceleration of economic activity, coupled with still elevated inflation expectations, inflationary pressures, and tight global financial conditions. On Thursday, the central bank will publish its third quarter monetary policy report, providing further insights on the macroeconomic scenario consistent with the Board’s decision and guidance. Finally, on Friday the minutes will be released.