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Goldman Sachs Say Disinflationary Process Not Sufficiently Consolidated

COLOMBIA
  • Goldman Sachs expect the MPC to hold the policy rate at 13.25% with a dissenting vote for a cut. They believe that the MPC will preserve the non-committal and data-dependent stance from the July meeting.
  • Consistent with the guidance from the last meeting, GS believe that the MPC is looking for convincing signals that the disinflationary process is sufficiently consolidated before initiating the normalization of the policy stance. In Goldman Sachs’ view, this is not yet the case.
  • First, headline inflation reaccelerated and beat the consensus forecast over the last two prints, with a sizable cumulative surprise of 42bp. Second, end-2023 headline and core inflation expectations rose by more than 50bp, which may be especially concerning at this late stage of the year given widespread backward-looking indexation mechanisms and the expectation of automatic price resetting in 1Q2024 to past inflation. Third, annual core inflation measures have plateaued at very high levels, with most of them still tracking in double digits. Fourth, despite favourable base effects, headline inflation is descending very gradually from its March peak and remains more than 7pp above the top-end of the inflation target band.
  • The Finance Minister, who chairs the MPC and casts a vote, recently declared that he would make the case for “even a small cut” at the meeting. At this juncture, GS do not believe that the majority of the Board will share his view. Instead, Goldman Sachs expect the MPC to reiterate its concerns about the speed of the disinflation process, elevated core inflation, and unmoored inflation expectations, while acknowledging the restrictive current policy stance and expressing some comfort in the ongoing macro rebalancing (e.g. narrowing current account deficit).

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