Banco de la República reduces the benchmark interest rate by 50 bp to 5.75%

Publication Date:
22:40

The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 50 bp to 5.75%. For this decision, the Board mainly took into account the following aspects:

  • In May, annual consumer inflation stood at 4.37%, and the average of core inflation indicators posted at 5.33%. These figures are lower than those registered a month ago. Analysts’ inflation expectations to December 2017 and 2018 are 4.37% and 3.54%, respectively. Those embedded in public debt bonds recorded slight changes, and are slightly above 3.0% for 2018.
  • The effects of the strong transitory supply shocks that deviated inflation from its target continue to fade. This is suggested by the slowdown of food CPI, for example. The average of core inflation indicators continued to decline more slowly, due to the indexation of prices and the effect of the transitory increase in indirect taxes.
  • The contribution of food CPI to the decline in annual inflation may reverse during the second half of this year. For this reason, forecasts indicate that the annual inflation rate could increase in that semester. 
  • In the last month, the price of oil lowered, and so far this year it stands below the forecast by the Central Bank's technical staff for 2017. External demand remains weak, and it is expected to grow somewhat above the figure registered in 2016. In this environment, country risk spreads have increased, and the peso has depreciated vis-à-vis the US dollar.
  • The information available on retail sales, consumer confidence, and from the monthly survey of economic expectations for the second quarter suggests that consumption growth is weaker than expected. The figures for imports of capital goods suggest that growth of investment different from civil works and construction would be low. With this information, the annual output growth rate is likely to post below the current projection.

Based on this information, the Board considered the following factors for its decision:

  • An incremental weakness in economic activity and the risk of deceleration beyond that compatible with the deterioration in the dynamics of income due to the fall in oil prices. Recent indicators suggest a significant increase in the excess capacity of the economy, although its magnitude is highly uncertain.
  • Uncertainty about the pace of convergence of inflation to its 3.0% target. Indexation mechanisms and the persistence of inflation continue to be reflected on the behavior of core inflation indicators.
  • The current level of the real policy interest rate ex-ante is contractionary.

In this environment, there was consensus among the Board of Directors to continue reducing the benchmark interest rate. The decision to reduce the benchmark interest rate by 50 bp was approved by four (4) members of the Board. The remaining three (3) Board Members voted for a 25 bp reduction.

Bogotá, D. C.