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SocGen: Risks To 9.5% Terminal BanRep Rate Forecast Remain To Upside

COLOMBIA
  • The BCCh is likely to tighten its overnight rate by 75bp to 9.0% in June. In SocGen’s baseline scenario, they see monetary tightening continuing in July, with the overnight rate peaking at 9.5%. Risks to their forecast are still high to the upside.
  • The BCCh promised to re-evaluate its monetary policy trajectory at its last meeting. The BCCh has tightened its monetary policy rate by 775bp (to 8.25%) since the beginning of the tightening cycle in July last year. At its last policy meeting, the central bank said that the inflation (in March-April) exceeding March forecasts intensified the risks, bringing it “to raise the MPR to around the upper bound of the policy rate corridor of the last MP Report.” At the same time, BCCh pledged to evaluate the monetary policy trajectory in its next report (due in June).
  • With inflation rising to 10.5% in April (core inflation at 8.3%) and likely to increase further this quarter, the inflation outlook for 2H22 is still highly uncertain –although SocGen expect moderation in their baseline scenario– and with inflation expectations for 2023 significantly above the central bank’s target, SG can’t see it sticking tooth and nail to its forward guidance.
  • As a result, they don’t see why the central bank would stop tightening until it sees inflation beginning to fall and expect it to tighten by 75bp in June and a final 50bp in July before concluding the tightening cycle. The upside risks remain (both for the June meeting and the terminal rate forecast) given the inflation uncertainties in the near term. The consensus expects rate cuts to begin in 4Q22, which compares with SocGen’s call for easing to begin in 1Q23.
  • Still, there is not much to choose from between these two calls given the still-fluid inflation outlook. Chile is among the few economies that are overheating, and in their view, it would take a substantial growth slowdown in coming months for the central bank to see merit in beginning easing so soon, particularly when the Fed and much of the advanced world would still be tightening.
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