What monetary policy will Banco de la República follow?

After five years, the Board of Directors of Banco de la República this Thursday began a new upward cycle in its reference rate , since at its policy meeting Monetary approved, four votes to three, to raise the interest rate by 25 basis points, up to 2%. Those who did not vote in favor of this increase were looking for a change of 50 basis points.

(Read: Banco de la República raises its interest rate to 2% )

According to Daniel Velandia, executive director of Research and chief economist of Credicorp Capital, the Issuer’s decision was in line with the expected by most economists in the market.

(Read: Banrep raised growth projection to 8.6% for 2021 )

However, he assured that the movement was less to what was implicit in the fixed income market, where market operators expected something close to 50 basis points of increase, in particular, considering that several central banks in the region have been increasing their rate at this rate.

“ It is worth saying that Colombia has had inflationary pressures somewhat less strong than in others countries in the region, mainly explained by temporary factors. That said, it is worth noting that the decision was very divided, four votes in favor of the 25 basis point increase, which materialized, and three votes in favor of a 50 basis point increase “, said.

And he added that this means that going forward, the rate of increase in rates will be highly dependent on the behavior of inflation and in particular on its expectations, which remain fairly anchored.

“ We recognize that inflation risks are on the upside as we continue to see global bottlenecks, high transport prices, semiconductor crises, among other reasons, which may lead to higher than expected inflation ”, he specified and at the same time added that the economy continues to show a more favorable behavior than previously demonstrated, so much so that the Banco de la República expects a growth of 8.6%.

“ We maintain our projection that the Bank’s rate will reach 2.50% at the end of the year and 3.75% at the end of 2022, but the future decision will be data-dependent on inflation ”, he specified.

In this regard, Sergio Olarte, principal economist at Colpatria , pointed out that the decision argument is a much more economical s reactivate and in better shape around the prepandemic levels; and a job that finally began to react as of August of this year.

On how the vote was divided regarding the percentage of increase in the interest rate, Olarte explained that “ this means that these three members are seeing, first a more sustained growth which is good news for the economy, but they may also be seeing an inflation that may be taking much longer to normalize, remember that inflation is above the target range of the Banco de la República “.

Finally, he indicated that “ in the future what we see is that they are warning us with that divided vote that in October, if inflation continues high, they will surely rise another half a percentage point to 2.50%, from then on, definitely the rate The increase in interest rates will depend on how inflation and growth fare, but we continue to think that the rise in interest rates will continue gradual and will remain low for quite a long time ”.

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