Banco de la República Raises the Benchmark Interest Rate by 25 Basis Points and Expands Its Foreign Currency Buying Program

At today’s meeting, the Board of Directors of Banco de la República decided to raise the benchmark interest rate by 25 bp, placing it at 4%.  The following aspects were taken into consideration by the Board in reaching that decision. 

• Annual consumer inflation in May was more than anticipated and has moved towards 3% faster than expected. Economic analysts raised their one-year-ahead inflation expectations compared to the previous month, as well as those implicit in public debt paper.

• First-quarter economic growth (6.4%) was significantly higher than forecast and accelerated with respect to the previous quarter. Moreover, 2013 GDP growth was revised upwards. Although the demand-side figures are not yet known, the information at hand suggests considerable momentum in domestic demand, particularly in its investment component. With this new information, there is increased likelihood that the economy is close to full use of its productive capacity in 2014.  At the same time, the seasonally adjusted unemployment rate continues its downward trend.

• Real interest rates have declined to the extent that inflation has moved towards 3%. Total lending continued to pick up in May, bolstered by commercial and mortgage loan performance. The slowdown in consumer loans came to a halt. 

• Economic activity in the United States is reviving from its first-quarter slump. The recovery in the Euro zone would have progressed slowly during the second quarter, as foreseen. Growth in the emerging Asian economies is stabilizing at favorable rates, while growth in several of the major Latin American economies continued to slow.

• Expectations persist for a gradual liquidity adjustment in the United States. In Europe, the ECB cut its benchmark rate and adopted additional monetary stimulus measures. The expansionary monetary stance is expected to carry on for an extended period of time. Foreign interest rates remain low, but are above the average witnessed in 2013.

• The upside risks weighing on inflation rose during the past month. The added increase in the first quarter compared to the forecast, the acceleration in inflation with respect to last year and revised figures for 2013 could lead to a faster than expected surge in inflationary pressures.

Given these circumstances, the Board believes current macroeconomic stability and the convergence of inflation towards the long-term target are compatible with a further increase in Banco de la República’s benchmark interest rate.  It also thinks the gradual adjustment in the expansionary stance of the country’s monetary policy reduces the need for abrupt changes in the future and ensures macroeconomic stability. Considering all these aspects and the time it takes monetary policy measures to have an impact on inflation and growth, the Board raised the benchmark interest rate by 25 bp.

The Board will continue its careful monitoring of performance and projections with respect to economic activity and inflation in Colombia, asset markets and the international situation. Lastly, it reiterated that monetary policy will depend on the information that is available.

The Board of Directors of Banco de la República also decided to increase the amount of international reserves purchased during the third quarter of the year and will accumulate up to US2 billion between July and September.

Published: 25/06/2014