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JPMorgan on BanRep: To Replicate A "Smooth" Cycle With "Uneven" Hikes

COLOMBIA
  • This tightening cycle is testing uncharted waters, insofar as it is the first since Colombia switched to an 8-voting-meetings per year schedule.
  • While this month's step up in the pace to 50bp certainly seems fundamentally rooted in BanRep's macro revisions, JPM also consider that the authorities may be looking to compensate for the non-voting November meeting. Effectively, BanRep's preference may be for what would be in the historical context a gradual and smooth 25bp-per-meeting pace, but adapting to the new voting schedule. If this is correct, a new pattern may emerge.
  • In this vein, their call is now for BanRep to revert to a 25bp hike in December, followed by a 50bp hike in January ahead of February's non-voting meeting. This pattern would repeat in the March-May period, leaving the policy rate at 4% by April 2022 (compared to 3.25% in their old scenario). At this point, with oya inflation expected to fall, in part on a base effect after May 2022, JPM think BanRep may downshift back to a 25bp-per-voting-meeting pace to reach a terminal rate of 5% by October 2022.
  • Given that this hypothesis has no precedent, conviction is limited. Should inflation or inflation expectations surprise strongly to the upside, for example, BanRep may well keep the 50bp pace in December.
  • The balance of risks at this point still seems skewed toward a faster cycle and/or a higher terminal rate. Nonetheless, by stepping up the pace now, BanRep now seems better positioned to catch up.
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