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Morgan Stanley on BanRep: Keep 1s5s COPxIBR Flattener

COLOMBIA
  • MS economists expect BanRep to deliver a 50bp hike (in line with market pricing) and expect the central bank to maintain this pace going into Q3’21, with risks to their terminal rate forecast of 5.25% skewed to the upside, given risks of further Fed hawkishness.
  • In the meantime, they keep their 1s5s COPxIBR flattener, as they expect Colombian rates to follow the same pattern as their EM peers as the hiking cycle progresses. MS continue to target 120bp and expect the ongoing flattening across the US Treasuries curve to also provide some support.
  • More broadly, going into 2022 the upcoming congressional and presidential elections are likely to take centre stage. However, MS think that it is still too early to read into the polls, particularly as centrist parties have yet to name a joint candidate and as historically Colombia has predominantly gravitated towards centrist leaders.
  • However, given recent unorthodox shifts across the broader LatAm region (which could prompt investors to extrapolate concerns in the absence of defined candidacies for now) and their expectation of sustained USD strength into year-end, MS think that a more cautious COP view remains warranted.
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