Barclays on Colombia: Faster Withdrawal Of The Stimuli

COLOMBIA

Barclays think the strong pace of economic activity is likely to be sustained through 2022, driven by strong domestic demand, business confidence that remains high despite electoral uncertainty, and the possibility of a rebound in oil production. These factors are likely to push Colombia to grow more than 6% in 2022.
Inflation remains more contained in Colombia than in the rest of the major LatAm economies but has been accelerating and surprising to the upside. Despite expecting inflation to peak in February, recent depreciation of the exchange rate and the 10% increase in the minimum wage could delay the beginning of the convergence of inflation back to the target.
While the inflation risks could be contained and might start to ease over the coming months, the current account deficit will probably be the main source of concern for Banrep. Barclays believe the recovery of oil production together with current high oil prices should contribute to narrowing the current account deficit to 4.1% of GDP in 2022. However, both monetary and fiscal stimuli need to be reduced to prevent the economy from overheating, otherwise the current account pressures risk being bigger.
Barclays expect Banrep to continue to take the lead in the removal of the stimuli to the economy as a significant reduction of the fiscal stimulus is not likely before the May elections.
Therefore, Barclays think Banrep would need to accelerate its tightening cycle in the January meeting, moving to a 75bp hike from 50bp in the December meeting. In the last board meeting, already three of the seven members voted for a 75bp hike, the latest data should move the balance in favour of this group. Barclays expect another 75bp in March and foresee a possible switch back to 50bp afterwards to bring the policy rate to 5.0% in April.
Given the uncertainty that the electoral process implies and the potential pressures it could create on the FX, they think the bank would prefer to reach a neutral rate before the electoral process.

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Barclays on Colombia: Faster Withdrawal Of The Stimuli

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