Banco de la República maintains the benchmark interest rate at 5.25


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The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 5.25%. For this decision, the Board mainly took into account the following aspects:

 

  • As expected, after a year of continuous decline, the figure for annual inflation increased in August to 3.87%. The acceleration of inflation was mainly explained by the higher rate of the yearly increase of the food CPI due to a low basis for comparison. The average of core inflation indicators continued descending, standing at 4.74%.

 

  • Analysts’ inflation expectations to December 2017 and 2018 are 4.18% and 3.58%, respectively. Those embedded in public debt bonds recorded slight changes.

 

  • The direct effects of the strong transitory supply shocks that deviated yearly inflation from its target would have already faded. However, core inflation indicators remain above the target as a result of the indexation of prices, the persistence of inflation, and the transitory effect of the increase in indirect taxes at the beginning of the year.

 

  • External demand remains weak, but it is recovering, driven mainly by developed economies. Oil prices increased, and it is likely that the terms of trade will post above the average level recorded in 2016 at the end of the year. In the United States, the Fed announced that it will slowly reduce its level of financial assets; also, the likelihood that this year the Fed would increase its policy interest rate increased.

 

  • In Colombia, the new figures for economic activity suggest that economic growth in the third quarter would be low, but higher than in the first half of the year. Thus, higher growth is projected for the second half of the year, in line with expectations.

 

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

 

  • Weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the dynamics of income due to the fall in oil prices. Recent indicators confirm there is an excess capacity of the economy.

 

  • 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 core inflation indicators, which exceed the inflation target (3.0%), as well as inflation expectations to one year and more.

 

  • After the reductions of the benchmark interest rate along the year, some indicators suggest that the real value of the reference rate is close to its neutral level, although there is uncertainty over such level.

 

  • Henceforth, reaching an expansionary monetary policy stance will depend on the forecasts for inflation, the output gap, and the current account deficit.

 

The decision to maintain the benchmark interest rate unchanged was approved by five (5) members of the Board. The two (2) remaining Board Members voted for a 25 bp reduction. 

 

Bogotá.

Friday, 29 September 2017
16:24

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