The Board of Directors of the Central Bank of Colombia at today's session decided to maintain the benchmark interest rate at 4.5%. In order to reach this decision, the Board mainly considered the following issues:
- The international prices of oil have fallen considerably, and are at levels unobserved since 2009. This reduction reflects increases in supply, a lower demand, and greater strength of the US dollar. Uncertainty regarding the future price of this commodity is high.
- The fall in the price of oil and the increase in the international prices of some food items imported by Colombia have generated deterioration in the country's terms of trade. This affects the growth of national income negatively.
- The currencies of several emerging countries continue to depreciate; their risk premia have risen, and the price of financial assets has fallen. The peso-dollar exchange rate has risen considerably, showing a strong volatility.
- The performance of global economy continues to be weak. The economy of the United States continues to recover, while the euro zone and Japan continue to experience low growth rates. The output growth in the main emerging countries continues to slow down or presents historically low increases. It is feasible that the recovery of our trade partners in 2015 would be, on average, weaker than it was estimated in prior months.
- In Colombia, the growth of the GDP in the third quarter of 2014 (4.2%) turned out to be lower than had been expected (4.6%). The results of the consumer confidence, retail trade, car sales, and consumption credit suggest that domestic demand maintains its dynamism. On the other hand, other supply indicators such as those of industry and oil production record low annual increases.
- Inflation by the end of 2014 will be posting in the upper half of the target range. The deviation with respect to the central point of 3.0% is temporary, and is explained fundamentally by the correction of transitory falls of some prices in the past, as well as of temporary increases in others. Core inflation is currently under 3.0%, and it is expected that total inflation converges to this value.
- Depreciation of the peso has been transmitted partly to the CPI of tradable goods without food and regulated goods. The volatility of the exchange rate and possible corrections to its level may limit said pass-through. Additionally, if depreciation is moderated, it is to be expected that transmission continues to take place, but without significant effects over inflation expectations.
In all, the domestic demand continues to show a healthy dynamism in a context close to the full use of the productive capacity. At the same time, inflation and inflation expectations are placed a little above 3.0%. The aforesaid takes place within an environment of deterioration of the terms of trade, depreciation of the peso, a growing uncertainty regarding the recovery of global economic activity, and the cost of external financing, which may affect the future behavior of aggregate demand. Having assessed the risk balance, the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered.
The Board will continue to carefully monitor the behavior and projections of the economic activity and inflation in the country, as well as those of the asset markets and the international situation. The Board reiterates that the monetary policy will depend on the information available.
Finally, considering the levels reached by several indicators for risk coverage of external liquidity, as well as the recent changes in the conditions of the exchange market, the Board of Directors decided not to continue buying international reserves.