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Inflation forecast revised higher.
2023/11/03 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

Banrep’s technical staff revised activity and inflation up for 2023, and sees a rate path, on average, above analysts’ expectations. In its updated Monetary Policy Report, Banrep’s staff revised its 2023 GDP growth forecast up by 0.3pp from the previous report to 1.2% (Itaú: 1.0%; 7.3% in 2022), but revised the 2024 GDP down by 0.2pp to 0.8%. The 2023 year-end staff’s inflation forecast was revised up by 0.8pp to 9.8% (Itaú: 9.5%; 13.12% last year) and to 4.0% for 2024 (+0.51pp). Regarding monetary policy, the central bank staff’s baseline scenario implies a policy rate path that, on average, is somewhat above the analysts’ expectations (which sees the policy rate at 13.25% during 4Q23 and 8.9% by the end of 2024). Additionally, the technical staff maintained the estimated neutral rate at 2.2% for this year, but raised it by 0.1pp to 2.4% for 2024.


The output gap is expected to remain positive this year at 0.7% of GDP (+0.5pp above August’s outlook) due to a smaller than expected decline in demand, but is projected to turn negative in 2024. Potential growth remained stable from the previous survey at 3.1% for 2023 and 2.9% for 2024.


Inflation forecast revised higher. The year-end 2023 inflation forecast was revised up by 84bps to 9.8%, due to food prices and indexation pressures (reflected in rent and public services prices). Core inflation is expected to fall to 8.36% this year (+45bps from August’s outlook). In contrast with the previous report, the inflation forecast incorporates effects from the “El Niño” phenomenon over the first semester of 2024, expecting a moderate impact in food and energy prices. Thus, for yearend 2024, the technical staff expects inflation at 4.0% (+51bps), still above the 3% target (analyst survey expectation: 5.32%), with core inflation at 4.24% (+50bps from August’s report).


The current account deficit is projected to narrow somewhat faster.  The technical staff expects the CAD to narrow to 3.4% of GDP this year (-60bps below August), from the 6.2% registered last year. For 2024 the CAD was revised down to 3.2% (-40bps from the previous report). Moreover, the technical staff expects the imports contraction to continue, also expecting a rebound in service exports associated with tourism. Additionally, the technical staff expects a reduction in FDI profits.


We believe the odds of starting the easing cycle later this year have fallen, as BanRep's technical staff revised growth higher, still elevated inflation expectations, inflationary pressures, and tight global financial conditions. The minutes of October meeting will be released on Friday November 3. The next monetary policy meeting will take place on December 19.