The Board of Directors of the Bank of the Republic is getting ready for the meeting in which it will make its penultimate monetary policy decision, amidst very high expectations on the part of analysts, study centers and the National Government; and constant calls for interest rates to fall faster than expected. has been doing so far, to take advantage of the favorable dynamics and reactivate the economy.
Although in the last five decisions, the majority of the Board voted for a 50 basis point cut in the monetary policy rate, in the September meeting, that majority was reduced from five to four co-directors, with three votes in favor of cut the interest rate by 75 points, which was seen by many like the possibility of more drastic falls in this reference to the future.
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However, a recent report from Corficolombiana warns that there are fiscal risks on the horizon that could work against a more lax position from the Issuer and extend the slow pace that the economy has been experiencing for some time now. Taking into account that recent decisions have prioritized the containment of inflationary risks, above the need for a greater boost to economic activity.
“According to the minutes of the September meeting, monetary policy has sought to bring inflation closer to the target with the least possible sacrifice in terms of economic activity; Although at the beginning of the year we expected that BanRep’s decisions would prioritize anchoring inflation expectations for most of 2024,” they noted.
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These analysts made it clear that although the initial expectation was that as the disinflationary process consolidated, the weight of that objective would balance with the need to provide greater stimulus to economic activity, this has not ultimately happened as expected. They expected and the monetary authority has been more cautious.
Based on this and despite the fact that at the time they assumed that rates would fall at a rate of 75 points in October, the cautious arguments presented by several co-directors and the information known during the last month regarding inflation, lead them to anticipate that, at this week’s meeting, the Board will decide again by a majority of 4 to 3 reduce the monetary policy rate by 50 points, to 9.75%.
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“According to the September minutes, the majority of the co-directors consider that accelerating the pace of interest rate cuts could entail significant risks for the continuity of the monetary easing process, since inflation is still higher than in other countries in the region. region and are concerned about the persistence of service inflation, the uncertainty about the adjustment of the minimum wage and the rigidity of inflation expectations,” they explained in this regard.
Risks and caution
One of the first points to analyze in this situation is inflation. which slowed to 5.81%, while core inflation, excluding food and regulated items, fell to 5.49%, remaining at its lowest since April 2022 and completely ruled out fears about possible effects of the trucker strike on the cost life.
Colombian pesos
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On this front, Corfi maintains that close attention must be paid to the rental component of the Consumer Price Index, which with a monthly variation of 0.58%, raised its annual inflation from 7.45% to 7.48%; generating strong pressures that were not expected at this point in the game.
“The indexation of rents to inflation from the previous year remained above 85%, a trend that reflects greater than expected rigidities and reinforces the concerns of some co-directors about the persistence of service inflation. In addition, core inflation showed a slowdown in its rate of reduction, going from 0.46 points percentages in the first five months to only 0.16 points between June and September,” they noted.
Meanwhile, in what has to do with economic activity, the Corficolombiana report highlights that several co-directors have been calm when mentioning that “the worst is already behind us” and highlight the signs of recovery of the economy in 2024 and in the projections for 2025 and 2026, “when it is expected that the Colombian economy will be growing at rates in line with its potential.”
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However, it puts on the table that some members of the Board mentioned fiscal uncertainty and its inflationary effect via a depreciation of the Colombian peso, as an additional reason for caution in the pace of interest rate cuts; which for them could add to the tensions so as not to lower rates quickly.
“These co-directors emphasize that the growing uncertainty on the fiscal front, given the lack of clarity about the size of the fiscal shortfall and how to finance it, makes it difficult for the country to fully benefit from the relaxation of external financial conditions, which contributes to increasing the inflationary risks of exchange origin,” they explained.
GSP reform
Another factor that will be reviewed at this week’s meeting is concerns that may have been intensified by recent information about tax revenues, since although collection increased 3.2% in September, it has accumulated a drop of 8.1% for the year.
Bank of the Republic.
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“The risk of failing to comply with the fiscal rule in 2024 is still latent, since the low collection requires an additional adjustment to spending, greater than $10 billion, over what is foreseen in the Medium Term Fiscal Framework -MFMP. This, even assuming that the announced $30 billion MFMP reduction is already incorporated into the fiscal closing, which is uncertain,” they stated.
Finally, Corficolombiana stated that this concern It is reinforced with the Draft Legislative Act 018 of 2024, which proposes increasing the resources of the General Participation System from 23.86% of the Nation’s Current Income in 2025 to 39.5% in the next 12 years.
“The end of the year will bring relevant decisions that could maintain uncertainty and continue tipping the balance towards a cautious monetary stance, such as the approval of the General Budget, Financing Law, GSP reform, labor reform and adjustment of the minimum wage,” they concluded.
Meanwhile, according to them, the uncertainty prior to the United States presidential elections, on November 5, has driven depreciations of Latin American currencies against the dollar and is reinforcing a more restrictive stance. by some central banks in the region, without ruling out that it could also happen in Colombia.
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