The Board of Directors of the Banco De La Republica Announces the Quantitative Inflation Target for 2014 and Keeps the Benchmark Interest Rate Unchanged

At today’s session, the Board of Directors of the Banco de la Republica confirmed their commitment to the long term inflation target of 3% and reiterated that the actions taken by monetary policy will continue to be directed towards making inflation converge with said value.  Thus, an inflation target of 3% was legally defined for 2014 with a range of +/- 1 pp.  Low and stable inflation is the best contribution that monetary policy can make to sustainable growth of output and employment.

The Board also decided to hold the benchmark interest rate at 3.25%. In making this decision, the following factors were taken into account:

- The results of worldwide growth for the third quarter show a foreign global demand that is recovering slowly mainly fueled by the developed countries. Both the growth in the United States and the recovery of economic activity in the euro zone turned out to be somewhat better than projected.  The growth of the large emerging economies in Asia and Latin America was heterogenous and the rates of growth in the majority were lower than their potential.

- The interest rates for American Treasury bonds have been relatively stable but at levels that are higher than the ones seen before May, the month when a possible reduction in the monetary stimulus on the part of the Fed was announced.   Nevertheless, the uncertainty with respect to the beginning and speed of normalizing monetary policy in the United States is high.

- The country’s terms of trade remain high but lower than those for previous years.  Going forward, no rise in these terms is expected in a scenario of dilatory recovery of the global economy and better conditions expected in the global supply of petroleum.

- In September, industrial production excluding coffee bean threshing showed a drop in annual terms again.  The annual growth of retail sales was low although it registered a rate of increase for the third quarter similar to the one seen in the second.

- The figures for October show a recovery in household confidence, an improvement in the sales performance of durable goods, and an improvement in the businessmen’s perception of sales.  The growth of the industrial demand for energy rose, and the surveys suggest a recovery in shipping and in the production expectations of the manufacturing sector for the coming three months.

- Due to the above, the technical team did not modify their growth estimate for the third quarter (between 3.8% and 5.4%) nor for all of 2013 (between 3.5% and 4.5%).

- In October, the total growth of bank loans slowed down although it remained higher than the rise in the nominal GDP.  The majority of the nominal interest rates for loans declined during the month.  In real terms, they remained below their historical averages (except for the credit card rates) and drove economic growth.

- Annual consumer inflation showed an unexpected, sharp drop as it went from 2.27% in September to 1.84% in October.  This was mainly due to a transitory fall in the growth rate of food prices.

- The economic analysts’ inflation expectations for a year from now as well as those derived from the public debt papers with maturities of less than five years declined and were below 3%.  To the degree in which supply shocks are diluted and the aggregate demand continues to be driven by an expansionary monetary policy, expectations are expected to converge on the long term target.

To summarize, economic growth in 2013 is expected to be similar to what was seen the year before.  To the degree in which the supply shock for food dilutes, inflation and expectations for it should return to the target range and pick up their convergence again towards the long term target (3%).  Interest rates are staying at levels that stimulate the economy’s aggregate expenditures.  Having evaluated the risk balance, the Board of Directors decided that it would be appropriate to keep the benchmark interest rate unchanged.

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

Bogota, D. C.