Banco de la República Lowers the Benchmark Interest Rate by 50 Basis Points

At its meeting today, the Board of Directors of Banco de la República agreed to lower the benchmark interest rate by 50 basis points. In doing so, it placed the base overnight rate for expansion auctions at 3.25%.  This decision was taken in light of the fact that the Colombian economy is growing below its potential and probably will operate below its productive capacity in the coming quarters. Moreover, actual inflation and forecast inflation are under the 3% target, and the current context is one where pass-through of the interest rate cuts does not appear to be as quick as desired.

The Board of Directors considered the following relevant factors in reaching this decision:

• Colombia’s trading partners are likely to grow less than expected. If this provides to be the case, the contribution to the country’s economic growth stemming from external demand would remain low.  Moreover, if the trend observed in prices for Colombia’s major exports continues, terms of trade would average less in 2013 than they did last year. Consequently, aggregate spending in 2013 would see no additional boost from an increase in national revenue.
• The new data on economic growth in 2012 (4%) show a slowdown from the high levels witnessed in 2011 (6.6%). The major loss in momentum came during the second half of the year and was explained largely by a significant reduction in investment growth. The rise in private consumption slowed during 2012, reaching rates similar to its historical average. The increase in exports also declined compared to 2011, with a significant drop during the fourth quarter.
• The explanation for the shocks to investment in the second half of 2012 is complex and may be due to a number of reasons, as indicated by the fact that all the components of this aggregate slowed during the final six months of the year.
• As for the first quarter of 2013, the deterioration in trade expectations and the drop in the consumer confidence index and auto sales suggest less momentum in private consumption.  The value of exports in dollars during January was similar to the figure posted a year earlier, and industrial exports saw positive annual growth. However, indicators of business confidence suggest industry continues to contract. This momentum denotes current economic growth below potential and, hence, an increase of the shortcomings with respect to use of industrial productive capacity.
• The decline in annual inflation from 2.0% in January to 1.8% in February was similar to what the technical team predicted. This slowdown is explained largely by the reduced rate at which food prices increased, mainly those for processed foods. All measurements of core inflation declined as well.  The average for these measurements is below the target (3%), as are inflation expectations. The recent decline in international prices for energy and other commodities means less pressure on domestic inflation.
• Banco de la República’s interest rate cuts have passed through to interest rates on deposits and loans in the financial system. However, real interest rates have not fallen to the same extent, thanks to the sharp drop in inflation and inflation expectations.
• Growth in the loan portfolio continued to ease.  There has been a slowdown in commercial lending in pesos so far this year, but an increase in financing through corporate bond issues, coupled with more foreign borrowing. Household lending (consumer loans and home mortgages) continues to grow less, but at rates higher than nominal GDP growth. The continued slowdown in the pace of leveraging by companies and households reduces the risk of generating financial excesses during the current expansionary phase of monetary policy.

In this context, an assessment of the risk balance points to the advantage of lowering the intervention interest rate by 50 basis points. In doing so, macroeconomic policy is expected to be consistent with economic growth near its potential. 

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 reiterates that monetary policy will depend on new information as it becomes available.