As expected, the Central Bank’s board unanimously held rates at 13.25% for the second consecutive meeting. Following the decision, the one-year ex-ante real rate remained at 7.23% (using the monthly analyst survey; +40bps 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 continues in an evaluation phase, awaiting for clearer signs of the disinflation process. Villar is signaling a preference for a greater inflation fall to unfold, referencing the fall of Chile’s inflation from its 14.1% peak to the 7.6% June print, before contemplating cuts. Colombia’s inflation has fallen 1.2pp from the 13.3% peak in March. Meanwhile, Bonilla seems open to making the September meeting live as the inflation trend consolidates.
Inflation expectations are adjusting down, while the activity slowdown in 2Q23 was swifter-than-expected. Inflation remains high, with core price rigidity as indexation continues to play a key role. Bonilla remarked that the MoF expects inflation to close the year at 9.2% and under this expectation, rate cut discussions may begin in the September and October meetings. The communiqué adds that recent loan dynamics are softening and the quality of the loan book deteriorates. In contrast, the labor market continues to perform favorably.
The COP’s outperformance continues to be highlighted. The board once again noted the significant appreciation of the Colombian peso and the decline in local risk premia, supporting a larger appreciation with respect to regional peers.
Rising risks that rate cuts unfold later this year. Activity is only starting to show signs of weakening and the labor market has been more resilient than expected, while significant uncertainty from El Niño persists. However, the consolidation of the significant COP appreciation and a preference by some in the Board to cut relatively soon, raise the risk that the easing cycle may begin during 4Q23. On Wednesday, the quarterly monetary policy report will be released, and the minutes of today’s meeting will be out on Thursday. The next rate meeting will take place on September 29.