At today’s session, the Board of Directors of the Banco de la Republica decided to raise the benchmark interest rate 25 bp and set it at 3.75%. In making this decision, the Board took the following aspects into consideration:
- In April, inflation continued its expected convergence with 3%. In addition, the inflation expectations of economic analysts for a year from now as well as those implicit in public debt paper rose with respect to the month before.
- The macroeconomic forecast indicates that domestic demand will continue growing at a favorable rate and that the economy will approach full use of its productive capacity in 2014. At the same time, the seasonally adjusted unemployment rate is holding to its downward trend.
- To the extent that inflation has been converging with its 3% target, the different, real interest rates have decreased. Between April and May, driven by the performance of commercial credit and mortgages, the growth of all loans continued to surge.
- The risk premiums for various emerging economies continue to decline and their currencies have appreciated with respect to the dollar. This phenomenon has been more pronounced in the case of Colombia. As a result, the Bank decided to use the total amount allocated for intervention that was authorized in March.
- The growth of the US GDP during the first quarter was revised downwards. This has been attributed to temporary factors related to adverse climate conditions. In the euro zone, the GDP expanded at a modest rate in the first quarter of the year at the same time as the growth of some of the main emerging economies slowed down. Due to this, the average growth of Colombia’s trading partners in 2014 is expected to be similar to what was seen last year and the average for the terms of trade to remain high.
- The expectations for a slow adjustment of the liquidity in the United States remain the same. Likewise, the expansionary monetary policy in other advanced economies is expected to persist for a lengthy period. Foreign interest rates declined over the last month and are staying at levels that are low but higher than the average seen in 2013.
- Under the circumstances described above, the Board believes that macroeconomic stability and the current convergence of inflation with the long term target are compatible with an additional increase in the Banco de la Republica’s benchmark interest rate. They also think that a gradual adjustment in the expansionary posture of the monetary policy will reduce the need for abrupt changes in the future and ensure macroeconomic stability. Considering all of this and the lags between monetary policy actions and their effect on inflation and growth, the Board decided it would be prudent to raise the benchmark interest rate by 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.