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GS Say June Minutes Validate Forecast For A Decisive 150bp Hike

COLOMBIA
  • The modal call from Goldman Sachs is for the MPC to hike its policy rate by another 150bp to 9.00%. The decision may result from a split vote, with one or more directors eventually supporting a more moderate rate hike.
  • In Goldman Sachs’ assessment, the recent macro-financial dynamics and a backdrop with a positive output gap and large current account deficit, demand maintaining the pace of hikes. A 150bp policy rate hike would be broadly in line with what is currently priced in the curve. Hence, a milder hike could be perceived as a dovish hesitant move, further unsettling the soft COP dynamics.
  • In their view, two statements in the June minutes validate this forecast for a decisive 150bp hike: (i) the abandonment of the “gradual but firm” process to future monetary policy adjustments reiterated in previous statements, and (ii) the acknowledgment that the excess productive capacity that remained after the pandemic had been exhausted.
  • GS highlight that the MPC warned that the June hawkish hike did not set a precedent for subsequent increments to be of the same magnitude (the MPC judged that future policy rate moves would be data-driven). However, in Goldman’s assessment, recent macro and financial developments warrant another decisive policy rate decision, and recent hawkish public statements by BanRep Governor Villar provide additional support for this view.
  • Adjusting by one-year-ahead inflation expectations, the ex-ante real policy rate is tracking at just 1.61%, while the central bank's estimate for the neutral rate in 2022 is 1.80% (1.90% for 2023). Therefore, despite the high inflation environment, monetary policy still remains expansionary, although to a lesser extent than before (the ex-ante real rate stood at 0.66% ahead of the June meeting).
  • Goldman Sachs believe a restrictive monetary stance (i.e. above-neutral policy rate) is warranted due to above-target inflation, drifting inflation expectations, volatile and weakening COP, resilient growth dynamics against a positive output gap, and a large external deficit (driven by buoyant domestic demand) whose funding could become more challenging as global financial conditions tighten and central bank’s in core economies turn more hawkish.
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