- Colombia: Inflation expectations increased again and the terminal rate is expected at 10%
- Peru: Growth came back in June!
COLOMBIA: INFLATION EXPECTATIONS INCREASED AGAIN AND THE TERMINAL RATE IS EXPECTED AT 10%
On Friday afternoon, August 12, the central bank, BanRep, released its monthly survey of economic expectations. Inflation expectations (IE) for the end of 2022 increased by 70 bps, as a result of the strong upside surprise in July inflation. In the same vein, by the end of 2023, the survey showed IE further deviating from the ceiling of the target range (5.70%), close to the expectation revealed by the central bank’s staff in the previous Monetary Policy Report. We expect July’s inflation aligned to the market consensus (0.54% m/m), closing the year at 10.41%.
The market consensus expects the hiking cycle to continue in 2022, with a 75 bps hike in September and 25 bps in October, to reach 10.0% as the terminal rate (+100 bps versus the previous survey). We expect a 50 bps hike in September, but we don’t discard a more aggressive move. The higher rate is expected to last around one year before starting to reverse.
- Short-term inflation expectations. For August consensus is 0.54% m/m, which places annual inflation at 10.31% year-on-year (from 10.21% in July). That said, the dispersion of the survey remains high with bottom expectation at 0.17% m/m and a maximum of +0.79% m/m. Scotiabank Economics expects monthly inflation for August to be +0.54% m/m and 10.31% y/y. In August we will have upside effects from Foodstuff prices, but we expect more moderate upside pressures from utilities and rent fees.
- Medium-term inflation expectations. Inflation expectations rose to 10.02% y/y for December 2022, 70 basis points above last month's survey (table 1), showing the effect of the upside surprise in July’s results. High input prices and international bottlenecks remain the main risk for headline inflation. IE for 1-year ahead stood at 6.14% y/y (above last month’s reading of 5.86% y/y); while the 2-year forward decreased 4 bps to 4.22% y/y, showing that there is still high uncertainty regarding the achievement of the inflation target range in the medium term (chart 1).
- Policy rate. Consensus still expects a 75 bps rate hike in September’s meeting, to leave the rate at 9.75% (from the current 9.00%); we expect a 50 bps hike. That said, the monetary policy rate is expected to close at 10% in 2022, and at 8% in 2023 (above the 7% expected in the previous survey) (chart 2).
- FX. The USDCOP projections for the end of 2022 were located at 4,176 pesos (below the previous survey 4,204 pesos). By December 2023, respondents think, on average, that the peso will end the year at USDCOP 4,042, and in 2024 at 3,965. We believe that the USDCOP would close in 2022 at around 3,950 pesos.
—Sergio Olarte, Maria (Tatiana) Mejía & Jackeline Piraján
PERU: GROWTH CAME BACK IN JUNE!
GDP for June bounced back to 3.4% y/y in June, after having slowed to 2.3% y/y in May (charts 3 and 4). Equally encouraging, growth was 0.7% m/m in June, and has now risen for three consecutive months, breaking more convincingly with the downtrend seen earlier in the year.
Sector results were a bit mixed, however, especially in m/m terms (table 2). Sectors that lagged in their post-COVID-19 recovery continued to lead in growth, namely hotels & restaurants (25% y/y) and transportation (10.9%), but, then, gave a much more confusing message in m/m terms. It’s especially difficult to understand the 13% m/m decline in hotels & restaurants in June.
Meanwhile, oil & gas is the sector that has become the new leader in growth, up 14% y/y. Oil & gas growth was in line with a strong increase in gas exports, as the gas industry (with output up 37% y/y!) responds to greater demand both domestically and globally.
Most sectors linked to domestic demand rose comfortably. It was especially encouraging, and mildly surprising, to see construction up 6.0% y/y and 3.0% m/m. Given the increase in mortgage interest rates and residential construction costs, the improvement is mostly linked to public sector investment in infrastructure construction, which was up 25% y/y.
Of the sectors that declined, agriculture was the most worrisome. Not only did agriculture GDP decline 1.6% y/y, but growth was nil in m/m terms. The reason for concern is because June is the height of the main harvest season for a number of staples, and this is obviously not good in a country already beset by inflation.
The 7.8% y/y decline in financial services was most likely linked to the withdrawal of the Reactiva loans that were awarded during the COVID-19 pandemic. Telecom, falling in both y/y and m/m terms, is more intriguing. Since most of the decline was in phones (both land-line and cell), as opposed to internet or cable, one wonders if this isn’t part of a backlash due to hacking.
The one data point in m/m terms that caught our eye is the 1.9% decline in commerce. Why would June be a worse month for commerce than May? This could possibly be linked to the decline in hospitality sectors.
All in all, however, June GDP belies the narrative that growth is softening in the country. Apparently, not yet. June is too early for this year’s access to pension fund withdrawals to have had an impact, but, then, a robust June is all the more reason for pension fund withdrawals to impact growth once the spending kicks in July.
—Guillermo Arbe
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.