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Analyst Notes Following Last Week’s Inflation Data

COLOMBIA
  • *TD reiterate their above-consensus call for a 50bps hike on January 27 (vs the 25bps consensus in BanRep's Survey) and acknowledge upside risks to it. However, they think the additional 150bps in hikes priced in the COP OIS curve may be excessive.
    • Real ex-ante policy rate is already close to the historical 5% (300bps above neutrality) and BanRep is not only responding to the latest data, but also by a forward-looking approach. This has already proved to be a challenge for policy communication.
  • *JPMorgan say upside surprises in headline and core inflation will keep the central bank under pressure to hike rates and limit the space for cuts in 2023. The deteriorating inflation picture adds to other structural weaknesses of the Colombian economy and sets the bar higher for policy response, increasing the likelihood of another episode of volatility in local markets.
    • On rates, besides the fundamental vulnerabilities, tactical risks include the heavy long positioning from foreigners and the unsustainable pace of TES purchases from the central bank.
  • *Scotiabank: The odds of a 100bps hike in January BanRep's meeting are now elevated. There is still a chance that inflation reaches a ceiling in Q1-23, mainly due to a historically-high statistical base level.
    • If inflation steadies in January and February, Banrep may be allowed to consider a pause at the March meeting to wait and see the effects of the hiking cycle on the economy. However, Scotiabank expect Banrep to continue with a data-dependent approach in January's statement.
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