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

At today’s session, the Board of Directors of the Banco de la Republica decided by majority vote to raise the benchmark interest rate 25 bp and put it at 3.5%.  In making this decision, the Board took the following aspects into consideration:

- In March, inflation and the average for the four measures of core inflation continued their convergence towards 3%.  The inflation expectations, in turn, of economic analysts for a year from now as well as those that are implicit in public debt paper have fluctuated around the long term inflation target.

- The macroeconomic forecast indicates that domestic demand will continue to grow at a favorable rate and that the economy will draw close to full use of its productive capacity in 2014.  As the same time, the unemployment rate that is not seasonally adjusted has continued on a downward trend and reached the lowest level seen so far this century.

- To the degree that inflation has been converging with the target of 3%, the different, real interest rates have dropped.  In March, the growth of loans as a whole surged slightly driven by the performance of commercial loans and mortgages.

- The risk premiums for various emerging economies have declined recently, financial assets in local currency have appreciated, and their currencies have also appreciated with respect to the dollar.  The preceding changes have been more accentuated in Colombia, especially in the public debt market as a result of the higher inflows of foreign capital.
 
- The recent data on global economic activity suggest that the worldwide recovery will continue in 2014.  In the United States, the latest numbers indicate that economic activity could maintain a gradual recovery while the expansion in the Euro zone will continue at a modest rate.  The slowdown in some emerging economies may become more accentuated.  With that, it is likely that the average growth for Colombia’s trading partners in 2014 will be similar to the rise registered in 2013 and that the average for the terms of trade will remain at high levels.

- Expectations for a slow adjustment to the liquidity in the United States are staying the same.  Likewise, the expansionary monetary posture in other advanced economies is expected to persist for a lengthy period.  The foreign interest rates have not shown significant changes and remain at low levels although higher than the average seen in 2013.

Under the circumstances described above, the Board thinks that macroeconomic stability and the current convergence of inflation towards the long term target are compatible with a monetary policy posture that is slightly less expansionary than the current one.  They also thought that a gradual and timely adjustment of this policy would reduce the need for abrupt adjustments in the future and ensure macroeconomic stability.  Considering all of this as well as the lags that exist between monetary policy action and the effect on inflation and growth, the Board decided it would be prudent to raise the benchmark interest rate 25 basis points.  

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. 

Published: 28/04/2014