Banco de la República Raises Its Intervention Rate

At a meeting today, the Board of Directors of Banco de la República decided, by a majority vote, to raise the intervention interest rate by 25 bp.  This will increase the base rate for repo auctions from 9.75% to 10%.

Annual inflation in June was 7.18%, which is 79 bp above the rate in May. The build-up was due to a sharp rise in food and regulated prices.

A number of core inflation indicators also increased during June, as did expectations of inflation.  These indicators continue to exceed the targets. 

Moreover, the international context is one of mounting inflation that has prompted many central banks to raise their policy rates. International prices for food and fuel remain high. 

The information on hand denotes more moderate growth in internal demand and output. Part of the slowdown is due to the sharp drop in civil works during the first quarter and to supply factors, such as the Cerromatoso strike. By the same token, the increase in food and fuel prices reduces real available income and raises production costs, which means more inflation and less growth in the economy.   The results of a range of industrial and consumer surveys, coupled with the figures released by DANE on commerce, industry and construction, confirm the slowdown in growth anticipated for this year. Given the new figures, the Bank’s technical team expects between 3.3% and 5.3% economic growth in Colombia during 2008.

Lower forecasts for growth this year in Colombia and worldwide would suggest no change in intervention interest rates. However, rising inflation, the outlook for inflation next year, and the importance of anchoring expectations of inflation to a downward trend in inflation indicate the intervention interest rate must be increased.  Low, stable inflation helps to maximize economic growth in the long run. 

Accordingly, the Board of Directors raised the Bank’s intervention rate to anchor inflation expectations to the long-term targets and particularly due to the risk of the collateral effects of international food and fuel prices.  The country’s monetary policy seeks to avoid having to adopt more drastic measures in the future in response to price and wage hikes that exceed the targets set by Banco de la República.  

The Board will continue to carefully monitor the international situation, as well as the behavior of inflation and economic growth, and their forecasts. It reiterated that future monetary policy will depend on new information that becomes available.