Higher inflation will lead to biggest rate adjustment in more than two decades

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Bets for a new upward adjustment of interest rates at Banco de la Repubblica, whose board of directors meets this Thursday for the sixth time in a year, not only because most market analysts believe that Eventually there will be growth, but because, in addition, It is expected to be one of the toughest since the adoption of the inflation targeting regime at the beginning of this century.

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It is not for less. with annual variation in Cost of living for Colombians in May 9.07 percentAs revealed by DEN, and market expectations point to 9.56 percent in June, most analysts, consulted by the Banco de la Repubblica itself and the Center for Economic Studies Federolo, believe that the issuer The rate increase will be more than one per cent.

There is consensus among experts that the Colombian Monetary Authority will act more vigorously to control extreme inflation that threatens to reach levels seen in the mid-2000s, when the country went through a severe economic and financial crisis.

Analysts expect it to rise to 8.5 per cent in September and remain there (rate) till the end of 2022

According to the latest survey of expectations conducted by Banco de la Repubblica, 51.2 percent of analysts consulted believe this Thursday’s increase will be one percentage point, taking the issuer’s intervention rate to 7 percent.

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About 4 out of 10 respondents expect the adjustment to be 1.25 percentage points, leaving the authorization rates at 7.25 per cent in July.
A similar forecast has most of those consulted by Fedsarolo (over 42 percent), who also forecast that the bank rate will be at that final level (7.25 percent) at the end of the meeting on June 30.

However, about 43 percent of those analysts “expect it to rise to 8.5 percent in September and that it will (rate) at the end of 2022,” he says in Fedesarolo.

If there is an increase of 125 basis points, he says in the Bankolombia group, it would be the largest in a monetary policy meeting in more than two decades, furthermore, he believes “the minority who do not support that growth”. will, they will opt for a more forceful adjustment, of 150 basic points”.

due to high adjustment

But why do analysts think the issuer’s board will be so aggressive in its rate adjustments this time around?

Undoubtedly, the biggest pressure is on the inflation side and there are increasingly high expectations that it will continue to be overwhelmed by market agents.

This is the same reason that has forced other central banks in the world to go out and tackle this high inflation by making loans more expensive, but with the inherent risk that this option triggers a recession.

The central bank of the United States (Federal Reserve) raised its rates in the middle of this month in a ratio (0.75 basis points) not seen since 1994, taking them to 1.5 and 1.75 percent.

Since then, 12 central banks have done the same, with adjustments of between 0.5 and 3 percentage points, a group that would join Colombia and the European Central Bank (BVC).

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Despite challenges on several fronts and thanks to a boost to household spending, the economy continues to make solid progress

For Bankolombian analysts, the recent behavior of inflation is the argument that will matter most in the issuer’s decision today.

“The average of core inflation measures increased by 50 basis points from one month to the next to 6.8 per cent, a rate not seen since August 2021,” he explains in a recent report, in which he highlights. The factor contributes to making the price increases seen in the previous year more persistent, but also suggests that demand pressures may have contributed to a greater extent to higher inflation today.

The second reason for the increase in the reference rate is that, “despite challenges on several fronts, and thanks to increased household spending, the economy continues to grow at a solid pace”, which will lead to growth in the country. among the highest globally.

The third argument, according to analysts in Bankolombia, relates to a rise in external rates and tightening of global financial conditions, which increases risk aversion, preventing foreign capital from entering the country.

“The rate hike brings with it an impact on the Colombian economy. On the one hand, it pushes the exchange rate up. That’s why we’ve seen him flirt several times this year with 4,100 pesos. Secondly, it makes the entire global funding structure more expensive, means that local interest rates are also raised and it slows local economic growth,” said Alejandro Reyes, chief economist at BBVA Research, Colombia. it is said.

According to people consulted by Fedesarolo, credit will continue to get more expensive in the second half of the year, as they expect the issuer’s rate to end 2022 at 8.5 percent.

For 55.8 percent of those consulted by Banco de la Repubblica, that level would be between 8.5 and 9 percent.



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