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Deutsche Bank Believe Medium-Term COP Prospects Not So Optimistic

COLOMBIA
  • While not expecting major disruptions in the short-term, Deutsche Bank believe more medium-term prospects for COP are not so optimistic as the central bank is facing dovish pressures from government authorities.
  • There are heightened fiscal risks, political noise is becoming an issue in the context of different corruption allegations against the administration and the current account dynamics are expected to turn more negative in the second half of the year.
  • In all, Deutsche believe the best for COP is behind us. On rates, DB see markets pricing an interruption in the easing cycle at above 8% after mid-2025, which implies too high a real policy rate versus the pace of economic growth they estimate. They believe that such pricing underestimates the full cycle by ~2pp. Although this certainly reflects uncertainty about the future of US and Colombia's monetary policies, we believe that adverse shocks would affect shorter tenors even more.
  • If BanRep does cut 75bp in June, Deutsche believe the repricing of 1Y rates would still be limited, as this tenor already prices in the policy rate close to 8.25%, thus flat vs. 2Y pricing. Accordingly, DB expect 1s2s to flatten.
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