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Scenario does not consider the materialization of an “El Niño” phenomenon.
2023/08/03 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón & Juan Robayo

The central bank’s quarterly monetary policy report revised activity and inflation slightly down for this year, while sees a rate path that, on average, is above analyst expectations over the two-year horizon. In the July survey, analysts saw rate cuts starting in October, reaching 11.75% by yearend and 7% by the close of next year. The technical staff revised its 2023 GDP growth forecast down by 0.1pp from the previous report to 0.9% (Itaú: 1.3%; +7.3% in 2022) and maintained the below-potential 1.0% growth forecast for 2024 (Itaú: 1.4%). Domestic demand is expected to continue to adjust towards more sustainable levels, in a context of low consumer and business confidence, high indebtedness of households, and a contractionary monetary policy. The 2023 yearend inflation forecast was also revised down by 0.5pp to 8.96% (Itaú: 9.5%; 13.12% last year), while 3.53% is expected for 2024 (+8bps). The technical staff maintained the estimated neutral real rate at 2.2% for this year and 2.3% in 2024 (2.0% last year). The one-year ex-ante real policy rate stands at 7.23%, a significantly restrictive position. 


Inflation expectations revised down for 2023. The yearend 2023 inflation forecast was revised down by 50bps to 8.96% due to lower pressures over core inflation and food prices, the accumulated monetary policy effects and the COP appreciation. Core inflation is expected to reach 7.91% this year (-96bps from April’s outlook). For yearend 2024, the technical staff expects inflation at 3.53%, nearing the 3% target (analyst survey expectation: 5%), with core inflation at 3.74% (-13bps from April). Inflation forecasts do not consider the materialization of an “El Niño” phenomenon this year, but recognizes its risk ahead.  


Due to the domestic demand correction underway the trade deficit is narrowing, supporting a CAD adjustment. The technical staff expects the CAD to narrow to 4.0% of GDP this year (-10bps from April), from the 6.2% registered last year. Moreover, the technical staff expects a reduction in FDI profits and a favorable remittances dynamics.


We believe the odds that rate cuts unfold later this year are rising. Activity is starting to show signs of weakening, the significant COP appreciation since prior peaks and a preference by some in the Board to cut relatively soon, raise the risk that the easing cycle may begin during 4Q23. Caution may stem from the resilience shown from the labor market and significant uncertainty from El Niño. The minutes of the July meeting will be out today. The next rate meeting will take place on September 29.