COLOMBIA – Monetary Policy Meeting: Paving the way for a hike in September

Signaling a gradual cycle ahead with a preference for retaining some stimulus

Vittorio Peretti & Carolina Monzón


A split board opted to hold the policy rate at 1.75%, but an improved growth outlook and rising external imbalances led the board to signal the start of the monetary policy normalization is on the short-term horizon. In fact, five of the seven board members favored keeping rates steady, with the remaining two preferring to already increase rates by 25bps. Overall, the board agreed that the space to maintain the current magnitude of monetary stimulus is narrowing, given the behavior of inflation and its possible persistence, as well as the upward revision of growth forecasts. This signal, along with comments by General Manager Villar at the press conference, point to a gradual cycle ahead with a preference for retaining some stimulus ahead. The next monetary policy rate meeting is at the end of September, and barring a significant surprise, a 25bp rate hike is the most likely outcome.

The advancement of vaccination programs has aided the recovery of the global economy. However, the board notes that new strains of the virus continue to pose a significant risk. Meanwhile, faced with inflationary pressures in the United States and other advanced economies, there is a risk that international financial conditions will tighten. 

Central bankers are more bullish on activity. The technical team revised its 2021 GDP growth forecast up by 1pp to 7.5% (Itaú: 6.5%; -6.8% in 2020). The improved scenario considers the unwinding effects of the protest action and the reduction of mobility restrictions. However, the still-fragile labor market, along with the elevated levels of uncertainty would lead to a negative output gap this year. The increased domestic demand forecast would results in a higher CAD forecast for this year (4.5% of GDP, from 3.4% in 2020).

The increasing inflationary trend was highlighted. Inflation increased from a level below 2.0% in the first quarter to 3.3% in May and 3.63% in June, with the board noting that the pressures on prices had an internal and external origin. However, inflation excluding food and regulated items continued at a low level, 1.87% in June. Some of these inflationary pressures could persist in the context of an economy that continues to recover and reduce its excess capacity, affecting inflation expectations (a key indicator mentioned by various members; the last survey still showed anchored medium-term expectations).

The split decision, a more upbeat growth outlook, and rising inflation risks point to a start of rate hikes in September, earlier than our previous call of December. The minutes of this meeting will be published next Tuesday, and the Quarterly Monetary policy Report will be released on Wednesday.

Vittorio Peretti 
Carolina Monzón