Latin American Economic Perspectives "Colombia Banrep: The Return of Rate..."

Research evidence excerpt

Latin American Economic Perspectives "Colombia Banrep: The Return of Rate..."

expected outcome—bringing the policy rate to 12% faster than anticipated—should

reinforce the appeal of COP as a carry trade over the summer, a view we are currently

expressing via short CLPCOP. While valuation buffers appear thin, carry at ~9% is close

to historical highs (92nd %ile, 10y range), among the highest across major EMs and

around 2x above estimated equilibrium levels. BoP risks remain contained despite lower

oil prices, supported by a favorable USD flow configuration (remittances and tourism

flows: ~5% of GDP; coal, coffee and oil exports: ~5% of GDP), while a gradual

reduction in still-elevated offshore hedging positions accumulated over the past two

years, and/or a quick resumption of oil exploration permits by the incoming

administration in early August, could provide additional catalysts for COP

outperformance over the summer. Looking further ahead, structural BoP drivers could

emerge, such as a recovery in FDI inflows or oil production, although these may take

more time to materialize.

The macro backdrop for rates, however, remains challenging, especially after the post-

election repricing that pushed real yields closer to historical norms relative to broader EM

rates. The growth-inflation mix looks more consistent with higher rates for longer (UBSe

headline inflation at 6.4% by year-end, rising to 6.8% in an El Niño scenario; with broad

pressure across core inflation metrics), while fiscal consolidation remains uncertain

despite the recent elections, and domestic demand continues to be supported by drivers

with limited sensitivity to higher rates. In this context, inflationary risks are likely to

remain elevated, keeping BanRep on a hawkish footing and rates under pressure,