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JPM Forecast Steady 25bps-Per-Meeting Tightening Cycle

COLOMBIA
  • They see the decision not to front load the tightening cycle as a risk that may exacerbate the upward drift on inflation expectations and/or latent financial stability concerns related to twin deficits.
  • The statement makes the case that higher observed inflation is largely a function of transitory shocks, and that medium-term inflation expectations remain closer to the 3% target midpoint. However, the statement also warns of the upward drift in expectations, which risks indexation dynamics that could lead to a more persistent deviation from the target ahead.
  • The statement in our view seems to endorse the rationale of the minority three board members who voted for sending more of a sense of urgency around the risks with a 50bp hike. However, the majority of the board voted for "gradualism".
    The signalling of the majority was more one of "slowly but surely", in a cycle that will be gradual, but last for a considerable period of time.
  • JPM now see a steady 25bps hiking path through end-22 but with greater risks. They had for a considerable period of time entertained a board that would attempt to pause the tightening cycle during the electoral period of March through June 2022. They now do not see space for such a pause in the absence of a more aggressive front-loading up front, as well as risks around inflation and expectations. Their new forecast calls for 25bp hikes per voting meeting through next year, taking the nominal policy rate to 2.5% by end-2021 and what would be a close-to-neutral 4.5% by end-2022.
  • However, the lack of front-loading and the higher inflation imply that real rates will remain more deeply negative than the former scenario. This risks exacerbating the concerns more urgently expressed by the minority related to a possible de-anchoring of inflation expectations and/or latent financial stability pressures related to large twin deficits. As such, JPM see material risks that market pressure will force BanRep to accelerate the pace at some point, despite their revealed preference for gradualism.
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com
EM BulletHomepagemarkets-real-timeBulletEmerging Market News
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com
EM BulletHomepagemarkets-real-timeBulletEmerging Market News

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