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COLOMBIA: Itaú Raises Terminal Interest Rate Forecast By 50bp To 6.5%

COLOMBIA
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  • Fiscal noise remains front and centre, with the government discussing a large 2% of GDP spending cut for Q4, as weak tax collection poses a risk to this year’s 5.6% of GDP nominal fiscal deficit target. Meanwhile, Itaú expects the de-centralisation bill to progress, with the fiscal cost between 2026 and 2035 amounting to 1.7pp. Itaú continues to see a stable 5.5% of GDP fiscal deficit next year.
  • Following the unexpected deflation in October, Itaú now expects CPI inflation to end this year at 5.1%, down from 5.6% previously. However, they have revised their 2025 CPI estimate up by 10bp to 3.7% due to higher pass-through from a weaker COP to goods prices.
  • Despite the CPI surprise, fewer cuts by the Fed, and heightened pressure on the exchange rate lead Itaú to believe that BanRep will maintain a 50bp pace in the last meeting of the year, taking the policy rate to 9.25%. They have revised their terminal rate for 2025 up to 6.5%, from 6.0% previously, due primarily to their call of fewer Fed cuts in 2025. Nonetheless, the replacement of two BanRep board members by President Petro, in February 2025, might lead to larger cuts and an acceleration towards neutral, to be eventually reflected in a weaker exchange rate.
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  • Fiscal noise remains front and centre, with the government discussing a large 2% of GDP spending cut for Q4, as weak tax collection poses a risk to this year’s 5.6% of GDP nominal fiscal deficit target. Meanwhile, Itaú expects the de-centralisation bill to progress, with the fiscal cost between 2026 and 2035 amounting to 1.7pp. Itaú continues to see a stable 5.5% of GDP fiscal deficit next year.
  • Following the unexpected deflation in October, Itaú now expects CPI inflation to end this year at 5.1%, down from 5.6% previously. However, they have revised their 2025 CPI estimate up by 10bp to 3.7% due to higher pass-through from a weaker COP to goods prices.
  • Despite the CPI surprise, fewer cuts by the Fed, and heightened pressure on the exchange rate lead Itaú to believe that BanRep will maintain a 50bp pace in the last meeting of the year, taking the policy rate to 9.25%. They have revised their terminal rate for 2025 up to 6.5%, from 6.0% previously, due primarily to their call of fewer Fed cuts in 2025. Nonetheless, the replacement of two BanRep board members by President Petro, in February 2025, might lead to larger cuts and an acceleration towards neutral, to be eventually reflected in a weaker exchange rate.