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Rate cuts unlikely until 2H23

Vittorio Peretti & Carolina Monzón


In a split decision, the central bank’s Board delivered another 100bp rate hike, taking the policy rate to 12%, in line with expectations. The third consecutive 100bp increase took the policy rate to the highest level since 2000. The split vote saw four board members vote in favor of the majority decision, while one member opted for a larger 125bp hike, and the final participating member preferred only a 25bp increase. The decision in the previous meeting (October) had the Board’s full support. The press release announcing the decision highlighted the upside inflation surprise, the pressures from a weakened COP on consumer prices, indexation and still upbeat activity in 3Q22. Following the hike, the one year ex-ante real rate increased to 4.5% (using the monthly analyst survey; +80bps from the previous meeting). At the press conference, General Manager Villar noted that monetary policy is closer to the end of the cycle, suggesting the cycle still has some way to go.

Betther-than-expected activity despite higher interest rates. The technical staff once again revised its 2022 GDP growth forecast up by 0.1pp to 8.0% (Itaú: 8.2%; 10.7% in 2021), following better-than-expected activity in 3Q22. For 2023, the staff maintained its GDP growth forecast at 0.5% (Itaú: 0.6%), hindered by a higher comparison base, tighter financial conditions and external headwinds.

Inflation expectations continue to rise. With inflation remaining on the up (+30bps to 12.5% in November), inflation expectations from surveys increased once more. The two-year inflation outlook picked up 25bps to 4.49% (3% target), while the two-year core inflation expectation ticked up 13bps to 3.87%. Ocampo highlighted food price pressure is the main risk for inflation given unfavorable weather conditions, amid still elevated global food prices.

The central bank did not discuss exchange rate intervention. Villar remarked that exchange rate dynamics have improved after the volatility experienced in October and early November. Additionally, he noted the that the pass-through estimates in Colombia remain contained (0.7pp for every 10% COP depreciation), but there is evidence that some prices have reacted more to the prolonged period of weaker currency.

A fully staffed Board in January. After his dismissal by the State’s Council, former Board member Alberto Carrasquilla did not participate in this month’s meeting. Going forward, Carrasquilla will be replaced by incoming Board member Olga Lucia Acosta.

The tightening cycle will likely continue with a final 50-bp hike at the start of 2023. With large twin deficits, resilient domestic demand and unanchored inflation expectations, the central bank will likely opt for another rate increase at the January meeting. Risks tilt that the tightening cycle extends beyond our current 12.5% call. We expect the policy rate to fall to 10% by the end of 2023, but rate cuts are not expected to materialize until 2H23. The minutes of the meeting will be published next Tuesday.

Andrés Pérez M.

Carolina Monzón

Vittorio Peretti