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A smaller negative output gap expected.
2024/05/06 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Banrep’s technical staff revised GDP growth up, and outlined an interest rate path that, on average, is above analysts’ expectations (8.25% yearend). In the second Monetary Policy Report of the year, Banrep’s staff revised its 2024 GDP growth forecast up to 1.4% (0.6pp above January’s report, Itaú: 1.0%; 0.6% in 2022), while adjusting the 2025 GDP growth forecast down to 3.2% (3.5% previously expected). The staff’s 2024 year-end inflation forecast was revised down by 0.4pp to 5.5% (Itau: 5.2%; 9.3% last year). BanRep’s staff envisages inflation at the 3% target by the end of 2025 (2.8% previously expected; Itaú: 3.0%). Regarding monetary policy, the central bank staff’s baseline scenario implies a policy rate path that, on average, is somewhat above the analysts’ expectations of 8.25% by December. The signaling is stable from the January report (when analysts still saw rates at 8.25% by yearend). The technical staff maintained the estimated neutral real rate at 2.4% for this year (5.4% nominal), yet revised 2025 neutral rate up by 10bps to 2.5%, likely explained by tighter global financial conditions.


A smaller negative output gap expected. The output gap is seen at -0.7% of GDP this year, smaller than the -1.2% in January’s report due to better-than-expected dynamics of the primary sector of the economy (agriculture and mining), along with certain services. Potential growth was revised up by 10bps to 2.9%, while revised down by 20bps in 2025 to 2.6% due to a gradual decline of excess production capacity.


The disinflationary process is set to continue. Inflation fell faster than expected in 1Q24. As a result, core inflation is expected to fall to 5.1% this year (-0.2pp from January’s outlook), and headline CPI down to 5.5% (0.4pp below the previous forecast). The forecast continues to consider transitory and moderate effects from the El Niño phenomenon, as well as the expected increases in diesel prices.


The CAD was revised slightly to the upside. The technical staff expects the CAD to narrow to 3.1% of GDP in 2024 (20bps above January’s call; 2.7% in 2023). This revision of the CAD is explained by the higher trade deficit in goods and services, likely due to the improved domestic demand outlook. Moreover, despite the upward revision of oil prices, lower export revenues are expected due to the fall in the prices of commodities such as coal and coffee.


Our Take: We do not expect BanRep to increase the pace of cuts until the disinflation process accelerates further. A smaller negative output gap, and tighter global conditions favor the continuance of the 50bp rate cut pace for now. Nevertheless if the inflation fall continues to exceed expectations, a more aggressive cutting cycle may materialize (two of seven members have favored an acceleration over the past two meetings). Our scenario considers a yearend rate of 8.75%, above the analyst survey’s 8.25%, and thereby more in line with the central bank’s signaling. The minutes of the April meeting will be released on May 6. The next monetary policy meeting will take place on June 28.