Colombia’s central bank is set to raise its key interest rate this week at its final meeting of the year and will be under pressure for another hike starting in 2023 as inflation expectations keep rising and economic growth remains at potential.
In the poll, 13 out of 14 analysts said the central bank would raise benchmark interest rates by 100 basis points to 12% this month, while one projected a rise of half a percentage point to 11.5%.
If the majority market forecast is met, interest rates could reach levels unseen since December 1999 and would have risen by 1,025 basis points since the beginning of the upward cycle in September last year.
“Inflation is not easing, expectations of inflation are likely to continue to rise and the output gap remains positive, which is reflected in a larger current account deficit,” said Felipe Klein, Latin America economist at BNP Paribas, who said the decision will be split among the bank’s seven-member board.
Most analysts – who until last month expected the rate’s upward cycle to end in December – now believe the monetary authority will enact another rate hike in January, after inflation surprised on the upside again in November by reaching 12.53% on a cumulative annual basis, its highest level since March 1999.
Both the central bank and analysts believe that inflation will return to its long-term target of 3% only by the end of 2024.
Adding to the upward price pressures will be the increase in the minimum wage next year, which is estimated by analysts to be around 15%.
“We are expecting a minimum wage hike around 15%, which would be at the low end of the range being discussed by local observers, but would still feed a strong indexation dynamic keeping inflation under pressure in 1H23”, said JPMorgan in a note.
“Our prevailing forecast is for BanRep to deliver a final 50bp hike in the January meeting”.
According to the poll’s median, the benchmark interest rate is expected to stand at 9.75% at the end of next year and to decline further to 6.25% by the end of 2024.