Stabilizing the macroeconomic outlook to ensure that interest rates return to levels that favor economic recovery is one of the priorities of the monetary authorities and an issue that study centers have been following closely in recent months, since although things seem to be getting back on track, there are still risks that are no longer limited to the local panorama.
A recent report by JP Morgan on the country’s macroeconomic situation maintains that the winds of recession that have begun to blow in the United States will have a direct impact on the dynamics of local markets, although it makes clear that if this is taken advantage of, it could play in favor of the flexibility of monetary policy that is so much being asked of the Bank of the Republic.
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Highlighting that the board of directors of the Issuer has shown serious In its intentions to maintain the downward path of interest rates, this banking giant puts on the table that the United States Federal Reserve (Fed) has revised its path of the federal funds rate (FFR), bringing forward a cycle of easing.
This, they added, could influence the decisions of the Bank of the Republic (BanRep) in Colombia, giving it more room to relax monetary conditions without risking an increase in the inflation of tradable goods.
Interest rates
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“While we believe that the main focus for BanRep in the coming quarters will continue to be the behavior of domestic prices, a lower FFR is expected to provide more room to relax monetary conditions without risking a persistent acceleration of goods inflation. marketable (through the interest rate differential),” they reported in the report.
This, however, for JP Morgan assumes the absence of persistent shocks to the exchange rate, such as those caused by a persistent decline in the terms of trade, while mentioning the possibility of a recession that has been discussed in recent weeks in the different markets.
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“It is worth noting that our global team is not forecasting a recession “In the US, although it is acknowledged that the probability of this has increased given recent developments in the labour market. Against this backdrop, we are maintaining the current policy rate path through the end of the year, noting that the probability of accelerating the pace of easing to 75 basis points per meeting has increased,” they said.
As such, they anticipate that the policy rate will converge to 8.5% by December and lower their projections for lower levels throughout 2025, aiming for this reference to fall to 6.5% by June 2025 (previously 7%) and to 5.75% by December 2025 (previously 6.25%).
Local risks
In addition to external factors, which may play in favor of local stability, JP Morgan indicated that in addition to the prevailing uncertainty regarding the global economy, there are two “idiosyncratic” risk factors: early next year, which for them could affect the good progress that is being made.
JP Morgan
EFE
First, they stated that possible changes in the Board of the Bank of the Republic in February and market perceptions associated with possible changes in the reaction function would have a direct impact.
In this sense they explain that “a more heterodox reaction function in the face of prevailing fiscal risks could exacerbate downward pressures on the local currency, counteracting the desired effect of lower rates,” which is why this issue should not be taken lightly.
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Secondly, this bank addresses a topic that, although the Government has already ruled out, remains relevant due to the noise generated by sectors close to President Gustavo Petro. It is about the possibility of a Constituent Assembly, regarding which they say that “the risk of greater uncertainty if it is decided to move forward with the convening of this mechanism, could lead to a scenario similar to the one Chile experienced in the years 2020-22.”
Favorable indicators
The Economic Commission for Latin America and the Caribbean (ECLAC) also joined this review of the interest rate situation and the future of monetary policy in Colombia, an organization for which the results seen in the current months of 2024 have been favorable and are gradually leading the authorities to give priority to issues such as reactivation and the creation of circumstances that attract investment.
In this regard, they explained that “the anchoring of inflationary expectations and the reductions in interest rates will contribute to boosting household consumption. The usury rate has fallen since April 2023 and is at the same levels as in June 2022, and the growth rate of the amounts disbursed in all modalities, except for microcredit, has registered a slight recovery since the beginning of 2024.”
Colombian economy.
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However, they add that although credit institutions have With solvency and liquidity levels adequate to face the materialization of various risks, the deterioration indicators of the portfolio are at high levels compared to the average of the last five years, as shown by the Bank of the Republic in its Financial Stability Report, which highlights an issue that must be monitored.
“Financing costs remain high compared to the 2019-2021 period, which limits the financial sector’s ability to reduce lending rates. Even so, the prospect of lower inflation rates has allowed financial institutions to reduce lending rates to bring to the present the better conditions generated by long-term financing rates,” they noted.
For both JP Morgan and ECLAC, Colombia is currently heading towards a scenario in which the decisions it makes will be fundamental to guarantee macroeconomic stability and deal with the slowdown, a scourge that continues without respite and requires urgent measures from the Government.
