As expected, the board of the central bank opted to hold rates at 13.25%, ending a hiking cycle that started late in 2021 (from 1.75%). Following the decision, the one-year ex-ante real rate increased to 6.83% (using the monthly analyst survey; +57bps from the previous meeting), consolidating the contractionary stance of monetary policy. The overall message from Governor Villar and Finance Minister Bonilla at the press conference announcing the decision was that the board has entered a period of evaluation, waiting for the consolidation of the inflation convergence path and for inflation expectations to adjust before evaluating the possibility of lowering rates. Bonilla suggested that after a 4-5 months of falling inflation (two achieved so far), the board could evaluate adjusting rates. The effect on inflation and inflation expectations from El Niño (upside), the fuel prices adjustments (upside), and COP appreciation (downwards) were inferred to as key factors to monitor.
Core inflation has yet to correct, while activity dynamics are softening. The press release notes the recent inflation drop, but highlights the drag from food prices while core inflation continues to rise. Medium-term headline inflation expectations of analysts are receding (but not yet anchored; 4% over 24months), while core inflation expectations increased over the one-year horizon. The board noted that activity weakened at the start of 2Q23, and the domestic demand adjustment is supporting a correction of the current account deficit. The central bank continues to see growth of 1% this year.
The COP evolution was flagged. The board noted the significant appreciation of the Colombian peso and the decline in local risk premia, despite still elevated global uncertainty and falling oil prices.
We expect rates to remain on hold for the remainder of the year. With both headline and core inflation elevated, activity only starting to show signs of weakening, a resilient labor market, and significant uncertainty from El Niño, we believe the bar is high for rate cuts to occur this year. Nevertheless, if the significant COP appreciation consolidates, a swifter inflation adjustment may unfold over the next semester, raising the possibility that easing discussions may start during 4Q23. On Thursday, the minutes of the monetary policy meeting will be released, and the next meeting will take place on July 31.