Colombian Peso: Is BanRep Set to Tighten Further? – Standard Chartered

Further monetary tightening could strengthen the Colombian Peso (COP) and worsen external imbalances, even as persistent inflation and elevated expectations support another rate increase, according to Standard Chartered’s Dan Pan. Citing a positive output gap, high oil prices and inflation risks linked to El Niño, Pan expects Banco de la República to raise rates by a final 25bps at its 30 October meeting.

Can BanRep curb inflation without fuelling COP strength?

"We expect Banco de la República (BanRep) to deliver a final 25bps hike at its 30 October meeting. The sustained inflation uptrend and elevated inflation expectations warrant continued tightening, in our view. Higher oil prices and possible disruptions from a ‘super El Niño’ are still skewing inflation risks upwards."

"The already-tight monetary stance and early signs of slowing growth may argue against consecutive hikes, but growth weakness likely reflects the temporary drag from the earthquake, while demand continues to overheat. Historically wide trade deficits in July and August may complicate the rate decision. Another hike could further drive currency appreciation, boost import demand and deepen external imbalances."

"Concerns about excessive COP strength could tilt the board majority towards a pause, similar to the July meeting. But the currency upside might be limited, as the market is already pricing in 25bps of hikes over the next three months (though this is not fully priced in for October). The currency is also 3% weaker than before the July meeting."

"BanRep may want to prioritise addressing domestic demand imbalances rather than temporary currency moves driven by rate differentials."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)