Colombia's central bank, Banco de la Republica, continued its hiking cycle with a 75bps increase in its policy rate to 12.75% at its first meeting of the year, on 27 January. The increase was, however, lower than the 100bps that was expected, according to the Bloomberg consensus survey.
It was the 12th increase in this tightening cycle, which began in October 2021, and brings the cumulative increase so far to 1,100bps. The policy rate is at its highest level in 23 years (since 1999) as the central bank fights inflation at its peak since then.
However, the lower-than-expected increase follows a run of three 100bps increases in a row, the most recent coming in the December meeting, and, before that, a couple of 150bps hikes, as the central bank tapers down the pace of increase. Still, the policy rate has now more than doubled since May.
The decision by the bank's board of directors was by majority. Five directors voted in favour of the increase, while two voted for a smaller increase (25bps). The voting pattern suggests a narrowing in the difference in views that existed at the previous meeting in December – that was also by majority, although with a wider range of views among the dissenters (one in favour of a 125bps increase and one for 25bps). The meeting prior to that in October was unanimous.
In its short statement, the central bank noted that inflation was higher than expected in December and remained on an upward trend. CPI inflation was 13.1% yoy last month, up from 12.5% in November, and compared with the Bloomberg survey of 12.7%. In fact, we observe that, bar one month (May 2022), there has been an increase in the annual rate (ie taking the first difference in yoy rates) every month since April 2021. Core inflation (excluding food and regulated items) also rose to 9.5% from 8.8%, according to the central bank.
The bank attributed higher inflation to higher food prices, accumulated exchange rate pressure on prices and indexation. It also noted a rise in inflation expectations.
That said, the bank noted a slowdown in leading indicators in the fourth quarter. As a result, real GDP growth is projected to slow to 0.2% this year, down from 8.0% in 2022.
However, it also appeared to change its forward guidance. It noted after its decision that "monetary policy is close to the stance required to induce a convergence of inflation toward its 3.0% target in the medium term", rather than being consistent with convergence to the target or bringing inflation down. Subsequent decisions will be data-dependent.
This may rekindle hopes that the central bank is finally near the end of its tightening cycle and that rates are close to their peak. The cumulative impact of monetary policy tightening so far, slowing activity and base effects should help to ease inflation readings going forward, while real interest rates are much less – albeit still – negative based on actual inflation. Moreover, real rates are positive – and well above the neutral rate – based on one-year ahead inflation expectations. Still, the bank may need to see actual evidence of lower inflation prints before pausing.
The minutes of the meeting will be published on 31 January and the next rate decision is due on 31 March.