Colombia | The path to monetary policy normalization
The Colombian economy is finally showing hints of an inflation build-up, with monthly CPI rising above its seasonal average in both April and May. Headline inflation is now at 3.3% y/y, and base effects alone will most likely bring it close to BanRep’s target of 4% by year-end.
What you will learn:
- As signs emerge that inflationary pressures are finally building in Colombia, we expect BanRep to use its June policy meeting to lay out its plan for withdrawing monetary stimulus, starting in July with a 25bp hike.
- But even if BanRep hikes rate four times before year-end, it will still be far from the end of its normalization cycle. Based on our modelling, the central bank will retract stimulus gradually, reaching a 4.75% terminal rate only in Q4 2023.
- This gradualism comes with risks. Asset price volatility ahead of the May 2022 general election could contaminate inflation expectations. Meanwhile, Colombia’s fragile external position makes it vulnerable to capital outflows in a world of faster tapering in the US and potential further rating downgrades.
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