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COLOMBIA: Itaú Says Sticky Inflation, Fiscal Risks Narrows Room For Rate Cuts

COLOMBIA
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  • Tighter global financial conditions along with sticky domestic services inflation, 2025's minimum wage increase and short-term stress in the fiscal accounts are likely to weigh on the next BanRep decisions, narrowing the room for rate cuts. Itaú sees the policy rate falling to 8.00% by the end of this year, from 9.50% currently, above their previous 6.75% forecast.
  • Itaú expects the disinflation process to slow this year, with inflation ending this year at 4.2%, above their previous 3.7% estimate. This is due to the larger-than-expected 9.5% minimum wage hike, well above BanRep’s 6.5% projection, which adds 45bp to their year-end inflation forecast. When considering the net increase after the inclusion of transport subsidies the impact could be even greater, with another 23bp added to their forecast.
  • While GDP growth is expected to accelerate from 2024, still high borrowing costs will weigh on activity, keeping growth below potential. Itaú sees the economy growing by 2.2% this year, up from 2.0% in 2024, but below their previous 2.4% estimate. Meanwhile, fiscal accounts will remain stressed, although a recovery in revenues and spending cuts should provide some relief. They believe that a 5.1% of GDP deficit target is challenging amid persistent revenue underperformance and expect a fiscal deficit of 5.5% this year.
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  • Tighter global financial conditions along with sticky domestic services inflation, 2025's minimum wage increase and short-term stress in the fiscal accounts are likely to weigh on the next BanRep decisions, narrowing the room for rate cuts. Itaú sees the policy rate falling to 8.00% by the end of this year, from 9.50% currently, above their previous 6.75% forecast.
  • Itaú expects the disinflation process to slow this year, with inflation ending this year at 4.2%, above their previous 3.7% estimate. This is due to the larger-than-expected 9.5% minimum wage hike, well above BanRep’s 6.5% projection, which adds 45bp to their year-end inflation forecast. When considering the net increase after the inclusion of transport subsidies the impact could be even greater, with another 23bp added to their forecast.
  • While GDP growth is expected to accelerate from 2024, still high borrowing costs will weigh on activity, keeping growth below potential. Itaú sees the economy growing by 2.2% this year, up from 2.0% in 2024, but below their previous 2.4% estimate. Meanwhile, fiscal accounts will remain stressed, although a recovery in revenues and spending cuts should provide some relief. They believe that a 5.1% of GDP deficit target is challenging amid persistent revenue underperformance and expect a fiscal deficit of 5.5% this year.