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Goldman Sachs on Thursday’s BanRep Meeting/Decision

COLOMBIA
  • Goldman Sachs expect the MPC to accelerate the pace of normalization and hike the policy rate by 150bp to 7.50%. The decision may result from a split vote, with some directors supporting to continue with the 100bp pace of hikes.
    • In their assessment, BanRep needs to accelerate the pace of tightening or it risks falling behind the curve.
  • Overall, adjusting by one-year-ahead inflation expectations, the ex-ante real policy rate is back to the low level ahead of the April 29 meeting: 0.66% (0.56% in April), while the central bank's estimate for the neutral rate in 2022 is 1.80% (1.90% for 2023). Therefore, despite the high growth and high inflation environment, monetary policy still remains somewhat expansionary.
  • In Goldman’s view, a restrictive monetary stance (above-neutral policy rate) is warranted given the strong growth dynamics, above-target inflation, drifting inflation expectations, and a large external deficit whose funding could become more challenging as global financial conditions tighten and central bank’s in core economies turn more hawkish.
  • In addition, in their assessment, high risk-premia and a weaker exchange rate given a challenging fiscal picture and an uncertain policy environment following the presidential election results, also justify a careful calibration of the central bank's monetary stance.
  • All in all, GS expect the MPC to raise the policy rate further up in 2022 to a terminal rate of at least 8.50%. They see risks to their call as skewed to the upside.

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