The Board of Directors of Banco de la República Raises the Benchmark Interest Rate by 25 Basis Points
At today’s meeting, the Board of Directors of Banco de la República decided to raise the benchmark interest rate by 25 bp, placing it at 4.25%. The following aspects were taken into consideration by the Board in reaching this decision.
- After climbing and moving towards the 3% target faster than expected, annual consumer inflation declined to 2.79% in June. This movement in inflation is due mainly to changes in the price of food and regulated items. The average of the various measurements of core inflation behaved similarly, and one-year-ahead inflation expectations remain near or slightly above 3%.
- Average growth for Colombia’s major trading partners proved to be weaker than was anticipated several months back, given the sharp drop in GDP in the United States during the first quarter and less growth reported by several countries in the region. However, based on recent real and financial indicators, the Bank's technical staff continues to project increased momentum in external demand during the coming quarters. On the other hand, energy mining revenues are still at high levels, but with a tendency to decline.
- In Colombia, recent figures prompted an upward revision of the economic growth forecast for 2014. It is a well known fact that GDP growth in the first quarter was more than initially predicted, driven partly by consumption and investment in the construction of civil works and structures. The good performance shown by these items is likely to continue during the rest of the year. Moreover, consumer confidence has improved, the slowdown in consumer lending has come to a halt, the momentum in retail sales continues to be strong, and there is a downward trend in the unemployment rate. All this suggests that real household spending will remain forceful this year. Consequently, the Bank’s technical staff set the new forecast range for growth in 2014 at 4.2% to 5.8%, with 5% being the most likely figure.
Growth in aggregate demand remained strong in the midst of a context marked by almost full use of productive capacity. At the same time, inflation expectations are near or slightly above 3%. All this is taking place in an environment where growth in lending has increased and real interest rates on loans are at levels conducive to spending. Given these circumstances, the Board of Directors felt it was appropriate to raise the benchmark interest rate by 25 bp.
The Board will continue to carefully monitor performance and forecasts with respect to economic activity and inflation in Colombia, asset markets and the international situation. Finally, it reiterated that monetary policy will depend on the information that is available.
Published 12/08/2014
