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MNI Colombia Central Bank Preview - Oct 2022: Decisive Response Needed

MNI Colombia Central Bank Preview - October 2022

MNI Colombia Central Bank Preview - October 2022

Executive Summary

  • The majority of surveyed analysts expect BanRep to hike the overnight lending rate by 100bps to 11.00%.
  • Further aggressive monetary tightening is deemed necessary amid rising inflation data, deteriorating inflation expectations and concerning pressures on domestic financial markets.
  • President Petro’s most recent comments relating to the inefficiency of rate hikes to tame inflation and his rhetoric surrounding capital controls provide a complicated backdrop for the MPC at the October meeting.
  • Surveyed outcomes range from +50bp to +150bp hikes, with some analysts highlighting the possibility of an FX intervention announcement despite the board’s comments suggesting it will not be implemented.

Click to view the full preview: MNI BanRep Preview - October 2022.pdf

Firmer August Economic Activity (+8.6% Y/y vs 6.4% in July) suggests that excess domestic demand is continuing to assert upward pressure on prices and contributing to large external imbalances. The relentless profile of inflation and sour current account balance data should tilt the majority of the board to opt for at least a 100bps hike and retain 2022’s hawkish bias in the post-rate decision press conference. This view is bolstered by the consensus view of a further acceleration for CPI in October, with the annual headline rate estimated to climb to 12.14%, while an improving unemployment rate only adds to the expected tightness of labour markets into year-end.

Alarming Petro Comments Spark Domestic Asset Selloff

Colombian asset markets have been roiled over recent weeks by heightened uncertainty over the policies of the Petro administration. Proposals such as capital controls were floated and despite then being rescinded, the impact on domestic financial markets was relentless.

Despite moderating its decline in recent sessions the peso weakened to a record low of 4,998.75 per dollar, while the yield on the nation’s 10-year local government bonds briefly surged above 15%.

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