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SocGen Expect 150BP BanRep Hike, Additional Hikes Likely

COLOMBIA
  • The peso is under pressure which could impact the inflation trajectory. With commodity prices having reversed course somewhat, the final support to the currency is gone too. The COP has been one of the weakest performers in the EM world and certainly the worst performer among the commodity exporters this year.
    • A wide current account deficit caused by outsized domestic demand growth and structural factors, considerable policy uncertainty associated with the incoming (inauguration on 7 August) leftist government of President-elect Petro and the low real policy rate from a historical perspective, amid tightening global financial conditions, all are exerting significant pressure on the peso.
  • Domestic inflation could rise even further although the high base effect and now moderating commodity prices could come to the rescue soon. The problem is that the economy is overheating after nearly two years of strong growth thanks to fiscal support.
  • With pressure on the currency mounting, one would expect further upside risks to inflation in 3Q22 before it cools meaningfully in 4Q22 onwards. Year-ahead inflation expectations have increased by another four ticks to 5.9% in July, their highest level since 2003.
  • After initially showing reluctance and falling behind the tightening curve (being the slowest to tighten rates this this year in the financially integrated Latam region), BanRep finally raised the pace of tightening to 150bp in June (taking the policy rate to 7.50%).
  • The new pace is likely to be maintained in July (SGe policy rate: 9.0%) as the real policy rate is still negative and inflation is rising. The pace of tightening at the September meeting will depend on the near-term inflation numbers, the year-ahead inflation outlook and the evolving pressure on the peso.
  • SocGen now expect the policy rate to peak at 10.00% vs their earlier forecast of 9.0% (consensus remains at 9.0% in 1Q23 but is likely to rise further). They still think rate cuts will begin in 2Q23 once inflation has moderated sufficiently.
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