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COLOMBIA: BofA Expects BanRep To Cut By 50bp, In Split Decision

COLOMBIA
BulletEM BulletEmerging Market News
  • BofA sees September as a very close call for the BanRep rate decision, with the board members likely to debate once again whether to cut rates by 50bp or 75bp. On balance, BofA expects BanRep to cut by 50bp to 10.25%, in a split decision. In their view, the outlook is consistent with a decline in short-term rates and pressure in the long-end.
  • Incoming data on consumer prices and the 50bp rate cut by the US Fed strengthen the case for accelerating the pace of monetary easing. However, the reduction of reserve requirements, two looming negative risks for markets (from the 2025 budget and BanRep board change), a positive surprise on economic activity, and other inflationary risks from the diesel price hike and on-going drought may tilt the balance towards maintaining the pace.
  • In BofA's view, the outlook is consistent with a steepening of the yield curve. They have some conviction that the market is underpricing two risks: a potentially dovish shift from BanRep and a possible deterioration on the fiscal front. While BanRep has reasons to be cautious near-term amid still-high inflation, they believe there is an increasing likelihood that it could accelerate the pace to 75bp in coming months, as inflation falls back amidst a still negative output gap and potential structural shift to a more dovish central bank board.
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  • BofA sees September as a very close call for the BanRep rate decision, with the board members likely to debate once again whether to cut rates by 50bp or 75bp. On balance, BofA expects BanRep to cut by 50bp to 10.25%, in a split decision. In their view, the outlook is consistent with a decline in short-term rates and pressure in the long-end.
  • Incoming data on consumer prices and the 50bp rate cut by the US Fed strengthen the case for accelerating the pace of monetary easing. However, the reduction of reserve requirements, two looming negative risks for markets (from the 2025 budget and BanRep board change), a positive surprise on economic activity, and other inflationary risks from the diesel price hike and on-going drought may tilt the balance towards maintaining the pace.
  • In BofA's view, the outlook is consistent with a steepening of the yield curve. They have some conviction that the market is underpricing two risks: a potentially dovish shift from BanRep and a possible deterioration on the fiscal front. While BanRep has reasons to be cautious near-term amid still-high inflation, they believe there is an increasing likelihood that it could accelerate the pace to 75bp in coming months, as inflation falls back amidst a still negative output gap and potential structural shift to a more dovish central bank board.