Banco Republica Holds the Benchmark Interest Rate at 3.25% and Adjusts the International Reserves Purchase Program

In their meeting today, the Board of Directors of the Banco de la Republica decided to hold the benchmark interest rate at 3.25%.  In making this decision, the Board took the following relevant factors into account:

- The figures for the third quarter show that the growth of a large number of advanced economies has improved while, at the same time, the emerging economies are growing less than the year before.  The average growth of Colombia’s trading partners will probably be lower in 2013 than it was in 2012.

- The international price for petroleum remains at high levels and the prices for some commodities that Colombia imports have fallen.  As a result, the terms of trade for the country are staying at high levels.

- The US Federal Reserve’s decision to keep the monthly purchase asset program unaltered contributed to the appreciation of international financial assets and the appreciation of the majority of the emerging countries’ currencies.

- The growth of Colombia’s GDP in the second quarter was higher than what had been projected.  With respect to domestic demand, both investment and consumption on the part of households and the government showed greater strength.  Likewise, the real growth of exports surpassed that of imports, something that has not been seen since the second quarter of 2009.  In the area of supply, all of the economic sectors with the exception of construction expanded at a faster pace than in the previous quarter with the agricultural sector showing the best performance.  Industry, including coffee bean threshing, grew at a positive rate after having contracted for three consecutive quarters.

- The indicators for the third quarter suggest that the GDP will grow at annual rates that are higher than those seen in the first half of the year.  Investment, especially investment in buildings, should grow at high rates while consumption will probably grow at the same rate as it did in the first half of the year.  That is what the retail figures, the monthly surveys of economic expectations for commerce, consumer credit, and salaried employment data suggest.

- Bank loans are growing at stable rates that are higher than those of the nominal GDP. In real terms the interest rates for the different types of loans are below their historical averages (except for credit cards).  The general financial conditions, however, may have adapted to the rising price of foreign financing.

- The new information increased the probability that, this year, the GDP will grow at a rate that is similar to the rate in 2012.  Nevertheless, although it is likely that the risks from advanced economies are now lower than before, those from some of the emerging economies may be rising.

- In August, annual inflation (2.27%) was in line with what had been estimated by the technical team and the core inflation average remained stable at 2.5%.  The average of the analysts’ inflation expectations and those calculated on the basis of the rates for public debt securities is similar to the inflation target of 3%.

In summary, the economic activity indicators and their forecasts show a level of output that is moving towards its potential.  As was to be expected, the actions taken by the monetary and fiscal policy up to this point contributed to stabilizing this trend although the downward risks are not negligible.  Inflation is low and the expectations for it are anchored to the long term target (3%).  Interest rates are staying at levels that stimulate the aggregate expenditures of the economy.  Having evaluated the balance of risks, the Board of Directors decided it would be appropriate to keep the benchmark interest rate at 3.25%.

They likewise decided to adjust the international reserves purchase program and will accumulate up to US$1 billion between October and November of this year.  The recent change in the exchange rate and the existence of an expansionary monetary posture along with other factors were taken into account in making the decision.

The Board will continue to monitor the performance and projections for economic activity and inflation in the country, the asset markets, and the international situation carefully. Finally, they reiterate that the monetary policy will depend on the new information available.

Bogota