Banco de la Rep\u00fablica resumed its tightening cycle with a 75bp increase, taking the policy rate to 12%, a larger move than Societe Generale\u2019s 50bp expectation and the broader market consensus. The decision came without explicit forward guidance, keeping the stance data-dependent, while the size of the hike pointed to readiness to tighten further should inflation dynamics deteriorate.<\/p>\n\n
Risks to the near-term inflation outlook were framed as tilted to the upside, with El Ni\u00f1o, wage indexation, and volatility in food and fuel prices cited as key factors. Societe Generale maintained its view that the terminal rate will reach 12.50%, while indicating that downside risks to that forecast have diminished. The note also suggested that an orthodox fiscal path could allow scope for easing in 1Q27, but that policy is expected to remain restrictive until then given still-unanchored inflation and ongoing political uncertainty.<\/p>\n\n
With Banco de la Rep\u00fablica\u2019s surprise 75 basis point hike to 12%, we should expect the front end of the yield curve to continue repricing higher in the coming weeks. Recent data showed June’s year-over-year inflation unexpectedly ticked up to 8.9%, driven by food costs linked to the ongoing El Ni\u00f1o weather pattern. We are now positioning for a terminal rate of at least 12.50% and see little chance of rate cuts before 2027.<\/p>\n\n
Given the bank’s commitment to a restrictive policy, the yield curve is likely to flatten further as short-term rates stay anchored at high levels. We see value in implementing curve flattener trades, such as paying fixed on 2-year swaps and receiving on 10-year swaps. This reminds us of the aggressive front-loading seen in Brazil during its 2021-2022 cycle, where the curve inverted sharply long before a policy pivot was considered.<\/p>\n\n
The lack of explicit forward guidance increases uncertainty, which makes owning interest rate volatility an attractive strategy. Buying options like straddles on short-term rates could profit from the sharp moves that may follow upcoming inflation reports. This aggressive monetary policy comes even as Q2 GDP growth forecasts were revised down to 1.1%, signaling the central bank is prioritizing inflation control above all else.<\/p>\n\n
For the Colombian peso, the higher interest rate differential should provide strong support and make it expensive to short the currency. The high carry makes being long the peso attractive, and we would use forward contracts or options to express this view while managing risk from political uncertainty. The peso’s 3-month implied volatility has already climbed to over 15%, reflecting the market’s cautious but attentive stance.<\/p>\n\n\n\n