Banco de la República Activates Interest-bearing Deposits as a Monetary Contraction Tool

Banco de la República, pursuant to a decision reached earlier by its Board of Directors, announces it will continue its active and discretional intervention in the exchange market.  The monetary expansion resulting from that intervention is offset by the Bank to keep short-term interest rates at levels regarded by the Board as consistent with the targets for inflation.  One of the contraction tools available for that purpose, among others, are interest-bearing deposits that do not constitute reserves held by the Bank on open-market operations. These interest-bearing deposits were authorized by the Board of Directors on December 17, 2004.

The Monetary Intervention and Exchange Committee, as instructed by the Board of Directors, is working to implement this contraction tool. It will be activated on Monday, April 2, 2007 under the following terms:

Banco de la República will open auctions for interest-bearing non-reserve deposits at 7 and 14 days.

The amounts of these auctions will be defined in a manner intended to keep the market’s short-term interest rates in line with the Bank’s intervention interest rate. The amounts in question will be announced in the auction call.

The base interest rate for the auctions will be equivalent to the one-day repo rate, minus 10 basis points, as instructed by the Board of Directors on June 2, 2006. The Bank’s repo rate is now 8.5%, and the base rate for the interest-bearing non-reserve deposit auctions is 8.15%.

In addition, unlimited deposit-taking at seven days in the form of interest-bearing deposits that do not constitute reserves held by the Bank will be authorized at a Lombard contraction rate equivalent to the base rate for the interest-bearing deposit auction, minus 100 basis points.  Today, the Lombard contraction rate is 7.15%.

The Bank is allowed to conduct monetary contraction operations through other instruments as well, such as final TES sales, government deposits with the Bank, and the adjustment in repo quotas.  

The Bank will continue to use these measures to offset the monetary impact of exchange market intervention, so as not to jeopardize the inflation target set by its Board of Directors.