|
The central bank of Colombia (BanRep) kept its policy rate steady at 13.25%, as uniformly expected. However, the decision was split (5:2), with Finance Minister Bonilla convincing another board member to vote for a 25bp cut. The statement avoided any forward guidance as usual, but added three hawkish tints: 1/ it suggests that activity continues to grow above trend; 2/it noted how pernicious inflation is for the economy and the poor, and 3/the majority noted that it is not yet prudent to begin a process of reducing interest rates – to which Governor Villar added potential capital outflow risk with early cuts. While inflation has peaked, momentum, lagging energy prices and indexation continue to slow Colombia’s inflation normalization compared to peers. Bonilla insisted in making October’s meeting live (just ahead of the next FOMC) and the split vote certainly puts the focus on next month’s decision. However, job strength, double-digit inflation and stickier inflation expectations will likely continue to limit the chances for cuts until December. Local rates have been unusually high recently due to banking stress (covered separately in detail here). The expected alleviation of this pressure through changes in banking policy should reduce the need for more immediate policy rate cuts. FX: The pause and lingering extra yields in the COP forwards still back carry short term, but falling local rates due to easing bank liquidity can weigh on COP to depreciate toward 4400 into 2024. Local rates: Despite policy rates being on hold, the easing of banking stress will lower CDT rates and spreads to TES, but is also likely to lower TES yields as the crowding out effect is reduced and investors return to TES. |