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SocGen: BanRep Preferring Relatively Gradual Tightening

COLOMBIA
  • Headline inflation rose steeply in Q1 (8.53% y/y in March vs 5.62% in December) on rising food prices, while the core inflation (headline excluding food) also rose to 5.30% in March (vs 3.44% in December). Further inflation acceleration is highly likely in the near term and both near- and medium-term inflation expectations have worsened in recent months even though stronger oil prices have led to a meaningful appreciation of peso. SocGen expect year-end headline and core inflation at 7.72% y/y and 5.68% respectively.
  • Data releases on growth indicators have continued to surprise to the upside this year, leading us to expect that Colombia will likely be among the fastest-growing economies in the Latam region in 2022. Stronger oil prices have lifted terms of trade and will help growth and fiscal performance. The economy is already growing above its potential, following double-digit growth in 2021. Growth indicators, except its impact on currency, point towards pipeline inflationary pressure.
  • BanRep has continuously raised its inflation forecasts for the policy horizon in recent meetings, and we expect further upward adjustments in April. Nevertheless, given its dovish recent gradual tightening, SG expect it to raise the policy rate by another 100bp in April. Additional rate hikes are imminent, in their view.
  • While SocGen expect the tightening cycle to peak at 9.75% in 3Q22, the gradual tightening approach means some of the tightening will be delayed into 4Q22. With COP appreciating strongly and the central bank tightening gradually, the risk to SG’s peak rate forecast is probably tilted to the downside despite the continued inflation acceleration at present. However, much of this would depend on how the global factors (i.e. geopolitical issues, supply-chain problems, financial conditions, etc.) pan out.
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