Banco de la Republica raised the benchmark interest rate 25 basis points

Publication Date:

In In their session today, the Board of Directors of the Banco de la Republica decided to raise the benchmark interest rate 25 basis points. As a result, the base rate for liquidity-expansion auctions will be 4.5%. The decision was made based on the following:
 

  • In June, annual consumer inflation rose for the second month in a row and was at 3.23%. Since March, the average for the core inflation measurements has shown a slight upward trend and, in June, it hit a level that was close to the mid-point of the target range (3% +/- 1 percentage point). The inflation expectations for several horizons are also within that range.

 

  • The global economy is still expanding but at a slower rate than was seen before. The growth of the advanced economies that have high levels of debt is showing weakness. In contrast, the emerging economies’ growth, especially the Asian ones, remains very strong. As a consequence, international prices for commodities are staying high. The terms of trade for commodity producing countries, like Colombia, are at historically high levels and contribute to the growth of their national revenue.

 

  • In Colombia, the growth of the GDP in the first quarter (5.1%) turned out to be higher than what had been estimated by the technical team and the market average. Private demand was the strongest, especially due to the performance of household consumption and investment other than public works projects. In addition, the figures for all consumption in 2010 were revised upward.

 

  • The recent information related to economic activity, which includes both supply and demand as well as consumer and industry expectations, indicate that the growth of the GDP in the second quarter could be similar to what was registered at the beginning of the year. For the second half of the year, the technical team expects economic activity to surge and, therefore, raised their predicted growth range to an interval of 4.5% to 6.5%.

 

  • The upswing in the growth of credit is continuing. All of its components, both those directed towards businesses and those towards households are showing real rates of growth that are significantly higher than the rise in the GDP. This is occurring in a context in which a large part of the real interest rates are at historically low levels.

 

  • As of March, the prices of used housing continued to rise and began to approach the maximum level which was seen in 1995. The indicator for new housing prices also rose in the first quarter.

 

The increase in the benchmark rate aims to keep inflation within the target range for this year and the coming one and will contribute to preventing future financial imbalances that would undermine the sustained growth of the economy.

The Board will continue to carefully monitor the international situation, especially the risks associated with managing the debt problems in a large number of advanced economies, as well as the trend and projections for inflation, growth, and the performance of the asset markets. They also reiterate that monetary policy will depend on the new information that is available .

Bogotá