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SocGen Expect First BanRep Cut In Q4 This Year

COLOMBIA
  • With headline inflation below policy rate, and core inflation likely to decline in coming months, SocGen believe that the BanRep is done with the tightening cycle and it will likely keep the policy rate unchanged over the next few meetings. SocGen expect a first rate cut in 4Q23, with meaningful upside risks on its timing.
  • The economy, despite the substantial slowdown, is still overheating, with aggregate demand trending above potential. Inflation is now falling but was still over four times the central bank’s target in May. Core inflation was still rising in May but is likely to fall from June. While these developments point to continued upside risks to rates, the central bank has been far more dovish in its response throughout the cycle.
  • SG believe that after tightening thus far and taking real rates to positive territory, the BanRep will follow year-ahead inflation expectations that have moderated meaningfully in the past few months (6.4% in June vs 7.9% in January). Inflation is likely to fall further in the coming quarters, lifting real interest rates further and exerting additional pressure on demand growth.
  • COP appreciation should also help stabilise prices and expectations, if not improve them substantially. The risks to SocGen’s near-term core inflation projection remain tilted to the upside on balance, given the still heathy level of demand. However, they do not see that leading to additional tightening by BanRep.
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