Banco de la República: how much will the rise in interest rates be?

Between 100 and 200 basic points (two percentage points) is the forecast that market agents and analysts they consider that the Banco de la República could raise its interest rate in the board of directors.

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Last September, the Colombian issuer completed a year of raising rates, up to 10%, to combat the acceleration of inflation from a level of 1.75%, the lowest in the country’s history, to counteract the effects of the fight against the pandemic and the closures of the economy during 2020.

In the current situation, the decision made by the central bank could bring the cost of money to a level similar to that of annual inflation, which in September was 11.44%.

Even if it increases above 100 basis points, that is, 150 or 200 basis points, the indicative rate would be placed in contractionary territory.

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In this way, according to consulted analysts, as almost all the central banks of the world have been doing, the recipe against Colombian inflation should begin to take effect in a few months as it is estimated that demand will be reducedbut also economic activity.

For Juan David Ballén, Director of Analysis and Strategy at Casa de Bolsa, one of the options that Banco República could take at its meeting on Friday is to increase interest rates by 200 basic points (bps) from 10% to 12%.

For the analyst, the first thing that must be taken into account is that any decision made by the entity, “conservative or aggressive, will have an economic and political cost, in the short and long term, for which it must apply the one that generates the least negative impact” .

In his Twitter account, Ballén considered that “if Banrep increases the interest rate by 200 bps, it would surprise the market since nobody expects it (the average analyst expects only 100 bps up to 11%)”.

devaluation

But he additionally warns that if the central bank raises 200 basis points, it may not have the need to intervene in the foreign exchange market since it encourages local and foreign investors not to take their resources out of the country and attracts more foreign investors. If the above is true, “there would be no need for the entity to decumulate part of its international reserves, which we will continue to need for a long time” and recalls that a global recession is expected in 2023.

Ballén assures that in November there is no meeting to decide on interest rates, “so to avoid convening an emergency meeting in the event that something extraordinary happens, it is better as a precaution to anticipate a rate increase at the October meeting” . According to the Casa de Bolsa analystIn the long term, the dollar would continue to rise due to the ban on oil exploration.

Another option, he says, is to raise rates by 150 points, which should be accompanied by foreign exchange intervention (just raising rates may not be enough).

“Any decision will have a cost, including doing nothing, if you are very dovish (too cautious) the market will charge you a higher dollar.

Arnoldo Casas, Investment Director of Asset Management at Credicorp Capital, says that the issuer had sent a pause message in the September hike, but the level of the dollar complicates things because it puts additional pressure on inflation by at least 2 .5% additional face next year.

In this way, he considered that the increase in rates is probably an additional 100 points and a message that they can continue to rise. He points out that the cost of borrowing for many agents is starting to get expensive, which can have an impact on investment.