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COLOMBIA: Itaú Expects BanRep To Remain Cautious

COLOMBIA
BulletEM BulletEmerging Market News
  • Following a large downside surprise to inflation in August and weak activity, Itaú expects BanRep to cut the policy rate by 50bp this month and continue easing later this year to 8.75% by year-end. Although inflation expectations have moved closer to the target range, inflation is still far from the 3.0% target, leading them to expect that the Board will remain cautious. For 2025, they estimate a year-end rate of 6.0%, with risks tilted to fewer cuts throughout the year.
  • Risks to inflation are on the rise. With the diesel price increase in September and December, transport and food prices should be pressured further, while the price of services continues to be sticky, especially rent prices. However, given the significant downside surprise in August, Itaú maintains their 5.6% year-end CPI forecast. For end-2025, they now see inflation at 3.5%, given next year’s expected diesel price adjustments.
  • Fiscal accounts remain stressed in the short-term as revenues have persistently underperformed. A gradual removal of diesel subsidies and another tax reform are projected to provide some relief to public finances, but risks of larger deficits loom. Meanwhile, the recovery of activity will be gradual. Amid still high interest rates, high (but falling) inflation and elevated domestic policy uncertainty continue to weigh on economic activity. Itaú expects GDP to rise 1.6% this year and 2.5% in 2025.
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  • Following a large downside surprise to inflation in August and weak activity, Itaú expects BanRep to cut the policy rate by 50bp this month and continue easing later this year to 8.75% by year-end. Although inflation expectations have moved closer to the target range, inflation is still far from the 3.0% target, leading them to expect that the Board will remain cautious. For 2025, they estimate a year-end rate of 6.0%, with risks tilted to fewer cuts throughout the year.
  • Risks to inflation are on the rise. With the diesel price increase in September and December, transport and food prices should be pressured further, while the price of services continues to be sticky, especially rent prices. However, given the significant downside surprise in August, Itaú maintains their 5.6% year-end CPI forecast. For end-2025, they now see inflation at 3.5%, given next year’s expected diesel price adjustments.
  • Fiscal accounts remain stressed in the short-term as revenues have persistently underperformed. A gradual removal of diesel subsidies and another tax reform are projected to provide some relief to public finances, but risks of larger deficits loom. Meanwhile, the recovery of activity will be gradual. Amid still high interest rates, high (but falling) inflation and elevated domestic policy uncertainty continue to weigh on economic activity. Itaú expects GDP to rise 1.6% this year and 2.5% in 2025.