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COLOMBIA: Deutsche Bank Forecasting Year-End Policy Rate of 8.75%

COLOMBIA
  • Deutsche Bank project continued declines of headline and core inflation, with the former likely going through a brief stalling before resuming its drop. After a recalibration of their inflation models, DB now see headline and core inflation closing the year at 5.2% and 4.9%, respectively. 
  • Given that inflation has behaved as expected, incoming activity data will likely play a more prominent role shaping the pressure on BanRep to accelerate the easing cycle. DB’s Taylor Rule estimates signal limited space to deliver a heftier cut.
  • Moreover, Deutsche are of the view that the ongoing deterioration of sentiment towards a handful of LatAm economies, whereby market participants appear to be parsing countries with relatively weak or weakening macroeconomic fundamentals - a category Colombia arguably belongs to given its challenging fiscal outlook and lingering policy risks - warrants continued caution. 
  • Against this backdrop, DB remain of the view that a majority of BanRep board members will favour maintaining the pace of the cutting cycle and trim the policy rate 50 bp to 11.25% in its June 28th meeting. DB still envisage an eventual acceleration of the normalization process and continue to pencil in the policy rate closing the year at 8.75%.

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