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JPMorgan Forecast Bolder 150BP Hike Due To Deteriorating Local Markets

COLOMBIA
  • Colombian local assets have materially deteriorated in recent weeks in response to waning confidence domestically, a weak position of external and fiscal accounts, and a hostile global environment.
  • The deteriorating conditions in local markets are unlikely to resolve without a credible and convincing policy response. In an extreme scenario, left unchecked, the negative dynamic between currency depreciation, FX passthrough to higher inflation expectations, and lower ex-ante real rates runs the risk of triggering a “sudden stop” episode of capital flows.
  • JPMorgan think BanRep will now have to step up in the face of the market pressure and expect BanRep to hike the policy rate 150bp today, up from the 100bp move of September.
  • Their forecast then looks for a 100bp hike in December (November in theory is a non-voting meeting), to leave the policy rate at 12.5% positive in ex-post real terms versus JPM’s inflation forecast for year-end, and around 5.5% in ex-ante real terms.
  • Such a move would show the authorities are keeping pace with what would be implied by a permanent shock to Colombia’s sovereign risk premium. If the neutral real rate was around 2% in the old regime, JPM think BanRep should be thinking of now getting well above 4% in order to be sufficiently restrictive in the current context.
  • Should the market fail to stabilize, the risk is BanRep will need to do more. In this scenario, JPM now think BanRep will need to stay high for longer than before (until 3Q23) and easing would later occur to keep the real ex-ante rate from going much more restrictive amid a strong growth slowdown, but not with space to get into easy territory. The policy rate would now end 2023 at 10.5% versus their prior scenario of 9%.
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