Banco de la República, the Central Bank of Colombia, announces 2012 inflation target and increases the intervention interest rate in 25 basis points

Publication Date:

In their meeting today, the Board of Directors of Banco de la Republica, the Central Bank of Colombia, defined the 2012 inflation target in 3%+/-1pp. The Board believes that the conditions or the Colombian economy let foresee that, hereinafter, inflation will remain in this range corresponding to the long-term rate. The best contribution of the monetary policy to the sustained growth of both economy and employment is at a low and stable inflation level.

 

  • In Europe, agreements and measures aimed at solving public debt issues and the financial system have not shown the impact expected so far. It is to be assumed that all these efforts will go on. The core forecast scenario indicates that the European economic activity would continue to weaken, but without a disorderly evolution. On its side, market consensus indicates that the United States economy should expand at a moderate rate for a long period.

 

  • The emerging economies are growing at rates getting close to their long-term trends, although some of the largest of Asia and Latin America have shown some moderation in their growth. This reflects in part the effect of macroeconomic policies aimed at controlling inflationary pressures.

 

  • The international prices of commodities remain at high levels and serve to encourage the national income of the producing countries.

 

  • In Colombia, the new information available continues to reflect a dynamic domestic demand, although certain indicators show some moderations starting at high levels. Until September, the effect of the weakest external context on total exports has not been significant, mainly due to the high international prices of mining-energy products. The new data have not changed the 2011-2012 growth predictions published in the last Inflation Report. The unemployment rate is still falling to one-digit levels.
     
  • Bank credit is still growing at a high annual rate. Households’ consumption is the most dynamic portfolio, since they seem to be increasing their degree of leverage in a significant way. New and used housing price indexes are at their maximum records.
     
  • Recent inflation data have exceeded those expected by the Bank’s technical team, and led to an upward revision of the short-term inflation predictions. Both base inflation measures and inflation expectations have continued to go up, but nonetheless remaining within the target range (3%+/- 1pp)

 

Taking into account the above-described core forecast, as well as the financial unbalances risks, the Board deemed prudent to increase by 25 bp the intervention interest rate, and it believes that this move serves to attain a monetary stance that helps maximize the growth and coherent use of the product with the attainment of future inflation goals. This decision incorporates the opportunity of detecting in time a substantial change in the external conditions of the economy and reacting to it accordingly, as fast as possible.

The highest risk in core growth predictions would be a disorderly adjustment in Europe. 

Should this risk materialize, the world economy would grow significantly less than expected and Colombian economy would be adversely affected. In this event, that has a high probability of being timely detected, the monetary stance might be adjusted rather fast.

Moreover, the main risk on inflation comes from excessive expansions in demand, or from increases in costs exceeding those projected with strong and perdurable effects on the expectations and credibility of monetary policy.

The Board will continue to carry on its careful monitoring of the international situation along with the behavior and projections of inflation, growth, and the behavior of asset markets, while reiterating that monetary policy will depend on the new information available.

Bogotá