Colombian Peso: BanRep seen tightening further – Standard Chartered

Standard Chartered's analyst Dan Pan anticipates Banco de la República will establish a final 25 basis points rate increase at their meeting on October 30th, citing positive output gaps, soaring oil prices, and inflation risks stemming from El Niño. Pan acknowledges the persistent inflation and heightened expectations, but also emphasizes concerns that additional tightening could strengthen the Colombian Peso (COP), compounding external imbalances.

The bank anticipates a final 25bps hike at the October 30th meeting. The escalating inflation trend and heightened inflation expectations support further tightening, the team believes. The already-constrained monetary environment and early signs of a slowdown in growth suggest that consecutive hikes may be unnecessary, though the economic slowdown is likely due to temporary effects from the earthquake, with demand remaining robust.

July and August's historically large trade deficits could complicate the rate decision. Heightened concerns over excessive COP strength may prompt the board to favor a pause, akin to the approach taken in July. However, the upside may be limited, as the market has already accounted for 25bps of rate hikes over the next three months, though this is not fully reflected in the October outlook.

The currency has also weakened by 3% since the July meeting. BanRep might prioritize addressing domestic demand imbalances over temporary currency moves driven by rate differentials.