Latin American Economic Perspectives: Colombia Banrep: The Return of Rate Hikes

Research evidence excerpt

Latin American Economic Perspectives: Colombia Banrep: The Return of Rate Hikes

Villar highlighted the emergence of additional

inflationary risks beyond those associated with an uncertain external environment,

particularly the potential effects of El Niño on food and regulated prices. These issues

should be addressed in the next monetary policy report (due 4 August).

Shifting our terminal rate higher from 12.00% to 12.50%

We are raising our terminal rate forecast to 12.50% from 12.00%, as we now see scope

for additional—albeit smaller—25bp rate hikes through Q3. While we expected Banrep

to resume rate hikes in the June meeting, both the larger-than-expected hike and the

emphasis on inflation convergence next year during the press conference suggest to us

that the hawkish majority on the board still sees room for monetary tightening in the

near term. True, yesterday's decision could reflect willingness to catch up by the hawkish

majority after the April decision to keep rates on hold. However, inflation is failing to

show signs of moderation; in addition, while food and energy price pressures are

temporary by nature, risks to inflation and inflation expectations' convergence appear to

be increasing (particularly if strong El Niño conditions manifest themselves through H2).

By our numbers, terminal rate levels—given our 6.4%/4.6% inflation forecast for

YE'26/27, and an output gap that remains open through the next quarters—sit at

~12.00%; however, alternative inflation paths amid early El Niño conditions in H2 show

potential for rates landing at ~12.50% by late Q3. We believe this is the risk scenario

that Banrep may be increasingly factoring into its policy deliberations, with the current

macro backdrop likely preventing the monetary authority from looking through such