In a divided decision, BanRep expectedly cut the policy rate by another 50bps to 10.75%. For the fourth consecutive meeting, two members voted for a larger cut. This month, the minority once more opted for a 75bp cut. Following the decision, the one-year ex-ante real rate fell to 6.52% (using the monthly analyst survey; -43bps from the previous meeting in June), still reflecting a highly restrictive monetary policy (BanRep’s real neutral rate estimate of 2.4%). The communiqué highlighted that annual inflation remained at 7.2%, with weather events pressuring food prices, while core inflation posted a mild decline. In July, the BanRep survey reported stable inflation expectations, while breakeven inflation fell across horizons (but all still above the 3% target). On the activity front, the technical staff revised the GDP growth call up by 0.4pp to 1.8%, while external financial conditions are seen to be less restrictive. Governor Villar signaled that upcoming decisions will be data dependent, as has been the case in previous decisions.
The disinflationary process is expected to continue in the coming months. Villar noted that the stabilization of inflation in May and June was expected by BanRep's technical team, but highlighted that core inflation continues to fall. The disinflation process is expected to continue in the upcoming months. Inflation risks have moderated, amid a lower probability of a strong “La Niña”, more favorable exchange rate dynamics recently, and less restrictive international financial conditions, increasing the likelihood that the FED starts to cut rates soon.
Government efforts to cut spending in 2024 should alleviate inflation pressures, despite diesel pressures. On the fiscal front, Villar praised the determination to comply with the fiscal rule, with spending cuts easing inflationary pressures. On the other hand, Bonilla acknowledged the need to increase diesel prices by between COP 2,000 and COP 3,000 this year. The MoF expects the full increase in diesel prices (COP 6,000) to have an impact on inflation of 1.4pp, divided between 2024 and 2025.
Our take: The speed of the disinflationary process and the fall in inflation expectations will determine when the Board feels comfortable accelerating the cutting pace. With activity being revised up, and diesel prices likely to stall the disinflation process, medium-term inflation expectations are likely to remain sticky above the 3% target. As a result, we expect the Board to cut by another 50bp at the September 30th meeting. However, rate cuts by the Fed during the latter part of the year could give BanRep’s Board room to step up the pace of rate cuts. On Friday, August 2, the central bank’s staff will publish the 3Q24 Monetary Policy Report. The minutes of the meeting will be released on 5 August.
