At its meeting today, the Board of Directors of Banco de la República decided to lower the benchmark interest rate by 25 basis points and, in doing so, placed the base overnight rate for expansion auctions at 3.75%. The decision took into account the fact that the Colombian economy is growing below its potential, observed and forecast inflation are under the 3% target, and there are no signs of upward pressure on inflation in the near future.
The Board of Directors decided as such in light of the following relevant factors:
- Global economic growth during the fourth quarter of 2012 was somewhat weaker than expected. However, so far in 2013, the indicators of economic activity and expectations in some of the larger economies have been more positive and financial conditions have improved.
- International oil prices rose and are at levels above the average observed in 2012. If the price of oil stays at these levels, it could offset the low coffee and coal prices and place terms of trade in 2013 above the average for 2012.
- In Colombia, the economic indicators for the fourth quarter of 2012 suggest private consumption grew slightly less than during the second and third quarters of that year. The uncertainty surrounding the behavior of investment remains high, particularly with respect to investment in civil works and building construction. On the supply side, the leading industrial indicators again suggest a drop in production in this sector during December, while the indicators for commerce point to acceptable growth. This being the case, the technical team estimates economic growth in 2012 should be within a range of 3.3% to 3.9%.
- Economic growth during the first quarter of 2013 will be affected by fewer business days during that period, as well as the supply shocks to coal exports and the risk of less demand from Venezuela.
- In January, annual consumer inflation (2%) was lower than expected, predominantly due to less of an increase in the CPI for food and regulated items. The tax reform helped to reduce some of these prices, a development that has a temporary impact on the annual change in the CPI. Other factors, such as lower production costs and moderate wage adjustments, also explain part of this behavior.
- The averages for both core inflation and inflation expectations are below the long-term target (3%).
- The slowdown in inflation, which was more than expected, occurred in the context of a negative output gap, a situation that may keep inflation expectations at low levels for a longer period of time. It also reduces the likelihood that unanticipated increases generated by supply shocks may jeopardize compliance with the inflation target.
- Lending continued to decelerate in January, but at a slower pace. Nominal interest rates on the different types of loans fell, with the exception of those for consumer lending, which increased during the month. In real terms, all the rates were up, partly because of the reduction in actual inflation and inflation expectations.
In these circumstances, an assessment of the risk balance indicates the desirability of lowering the intervention interest rate to 3.75%. The monetary policy actions being taken are intended to place output near the economy’s productive capacity, without jeopardizing the inflation target and the country's macroeconomic stability.
The Board reiterates that Banco de la República has sufficient tools and resources to satisfy the economy’s regular liquidity needs in both local and foreign currency, as well as any needs that might arise in an environment of international financial turmoil.
The Board will continue its careful monitoring of performance and projections with respect to economic activity and inflation in Colombia, asset markets and the international situation. Finally, it restates that monetary policy will depend on new information as it becomes available.