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SocGen Keep Banrep Rate Forecast For June Unchanged At +100bp

COLOMBIA
  • Both headline and core inflation have accelerated quite significantly this year despite the government’s supportive measure to keep energy prices low and some appreciation of the peso. Inflation is likely to rise further in 3Q22 before beginning to decelerate in 4Q22 given a high base effect.
  • Moreover, the overheating economy due to strong growth through 1Q22 has not helped on the price front. And initial releases suggest the economy has not lost much momentum in 2Q22. Year-ahead inflation expectations have risen to 5.5% this month. SocGen do not see inflation converging to BanRep’s target range (2-4%) until close to the end of next year with substantial upside risks persisting.
  • Despite the steep rise in inflationary pressure, the central bank has preferred a relatively gradual pace of tightening compared with other regional central banks (Brazil and Chile in particular), who have gone for frontloaded tightening. The board's reluctance to raise the pace of tightening in the last couple of meetings, despite raising inflation forecasts and seemingly falling significantly behind the tightening curve remains a surprise.
  • While SG see lots of merit in BanRep raising the pace of tightening in June, now that the Fed has also turned more hawkish, they keep their BanRep rate forecast for June unchanged at +100bp (to 7.0%).
  • A June rate hike would establish a clear positive real interest rate given the current level of core inflation. Still, SocGen see a substantial possibility of BanRep reassessing the situation and raising rates by 125bp or even 150bp in June.
  • Irrespective of the size of the hike in June, SocGen see some upside risk to their terminal policy rate forecast at 9.0% in 3Q22. The consensus terminal rate forecast is 8.40% for 4Q22. They think rate cuts will likely begin in 2Q23 when they expect inflation to moderate sufficiently.
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