NEW YORK — Colombia’s economy rebounded in 2021 from a heavy COVID-19-pandemic induced contraction, and the pace is likely to continue this year. The performance should lead the nation’s central bank to quicken the pace of policy rate increases to 75bps in its next monetary meeting on January 28, according to the latest forecast by Barclays PLC.

“We expect Banrep to accelerate its tightening path to 75bp in the January meeting, reaching a potentially neutral 5.0% rate before the June elections,” analysts Alejandro Arreaza and Juan Prada wrote in a report to investors dated January 10. “The pace afterwards will probably depend on the election outcome, but in principle we see a 5.5% terminal rate,” they added.

The analysts projects that Colombia’s economy will grow this year more than 6% after the 10% expansion registered in 2021, “driven by strong domestic demand, business confidence that remains high despite electoral uncertainty, and the possibility of a rebound in oil production.”

In the previous meeting held on December 17, BanRep’s board raised its benchmark interest rate by 50bps to 3% in an effort to tame a rising inflation and pre-empt an increase in the minimum wage scheduled for this year. The decision was divided, with four policymakers voting for a half-point hike and three in favor of a 75bps increase.

Barclays expects now a shift in the board’s inclination in light of recent economic data. “We expect another 75bp in March and foresee a possible switch back to 50bp afterwards to bring the policy rate to 5.0% in April. Given the uncertainty that the electoral process implies and the potential pressures it could create on the FX, we think the bank would prefer to reach a neutral rate before the electoral process.”

Rising Inflation

Colombia’s annualized inflation rate rose to 5.62% in December, following a 5.26% increase in the previous month and topping market expectations for a 5.33% rise, according to data compiled by Trading Economics. The print was the highest reading in nearly five years driven mainly by further increases in cost of food & non-alcoholic beverages (17.23%) and restaurants & hotels (8.83%), as well as transportation (5.69%) and alcoholic beverages & tobacco (4.6%).

“We have been expecting inflation to peak in February; however, recent depreciation of the exchange rate and the 10% increase in the minimum wage could delay the beginning of the convergence of inflation back to the target, ” the Barclays analysts said in their report.

“Although inflation has been accelerating, it remains more contained in Colombia than in LatAm peers,” according to the report. “It could still move above 6.0% before it starts to moderate in Q2, but we still view a return to the 3.0%+/-1pp target range by the end of the year as likely.”

On its latest outlook report, Global Economics Prospects, the World Bank projects Colombia’s growth will slow down to “fairly robust rates” of 4.1% this year and 3.5% in 2023, as the drag from high, investment-driven growth last year fades and labor market conditions improve. “A fiscal reform plan passed in September, together with a reinstated fiscal rule after a two-year suspension due to the pandemic, provides a framework for fiscal consolidation in the medium term,” the multilateral lender said in the report unveiled January 11.

In BanRep’s last meeting the central bank revised its 2021 and 2022 inflation projections, raising the 2021 estimate to 5.3% from a previous 4.9% and the 2022 projection to 3.7% from 3.6%, Reuters reported in December.

Colombia elects a new president and lawmakers in the first half of the year. Legislative elections will be held March 13, while the first round of the presidential election takes place May 29. An eventual runoff is scheduled for June 19.

Also relevant:
* Colombia’s BANREP Raises Rate 50bps to 3% on Rising Inflation: Reuters
* Despite High Oil Prices, J.P. Morgan Sees Colombia’s CAD ‘Well Above’ 5% in 2022-2023
* Despite the Polls, a Centrist Could Win Colombia’s Election in May: The Economist
* Colombia Presidential Frontrunner Petro Would End New Oil Exploration: Bloomberg
* IDB Invest Signs USD200 Million Financing Deal for Colombia’s Puerto Antioquia

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