Colombia | Raising rates is unpopular but necessary

Summary

Banco de la República increased its intervention rate by 100 bp at its last meeting. On the one hand, analysts expected an increase of 150 bp, while businessmen expected more moderate adjustments. Going forward, further rate increases are expected to counteract the high inflation levels.

Key points

• Key points:
• During the year, the Bank has increased its rate by 325 bps in response to the strong acceleration of inflation, which in a very short period of time went from 1.5% to 8.5%, and to an economic activity that is still robust and with very good growth.
• For analysts, these were obvious reasons to make a significant adjustment in interest rates and, therefore, they expected an increase of 150bp.
• For businessmen, the concern is that rate increases may affect the recovery of their businesses, especially now that they are recovering from a very difficult 2020.
• We believe that a 150bp rate hike is still among the options, although the expressed preference of several members for a gradual adjustment cannot be ignored. In the end, the most important thing to note is that the Bank will continue to raise rates, we expect, to 8.0%.
• The Bank needs to send a strong message to avoid creating inflationary spirals. If it does not do so, it will surely have to make a much more marked effort in rates in the future, which will have a greater impact on the economy.

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