The Board of Directors of Banco de la República, at today’s meeting, decided to reduce the benchmark interest rate by 25 bp to 7.0%. For this decision, the Board mainly took into account the following aspects:
- In February, consumer annual inflation decreased for the seventh month in a row, reaching 5.18%. The average of core inflation indicators remained stable at 5.58%. Analysts’ inflation expectations to December 2017 and 2018 decreased, posting at 4.49% and 3.6%, respectively. Those embedded in public debt bonds also lowered, and are close to 3.0% for the end of 2018.
- The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade. This is suggested by the slowdown of the CPI in February, for example.
- Annual CPI variation excluding food and regulated items increased, possibly due to the effect of the increase in indirect taxes. Also, by the indexation mechanisms that deepened in recent years simultaneously with the increase in inflation.
- In Colombia, recent indicators of economic activity such as retail, industrial production, and consumer confidence suggest weakening of the economy in the first quarter of the year. Should this trend be accentuated, the technical staff´s growth forecast for 2017 could be reduced (2.0% within a range between 0.7% and 2.7%).
- Considering the current levels of core inflation indicators and inflation expectations, various calculations of the real policy interest rate are above their average since 2005.
Based on this information, the Board considered the following factors for its decision:
- Higher international uncertainty, weakness of the economic activity, and the risk of an excessive deceleration. Recent indicators point at a greater risk of increases in the excess capacity of the economy, although uncertainty on its size is pronounced.
- The uncertainty regarding the pace of convergence of inflation to its 3.0% target. The reduction in inflation was higher than expected by the Bank's technical staff and by the market average. However, indexation mechanisms and the increase in the persistence of inflation may slow its convergence to 3.0%.
- The current level of the real policy interest rate is contractionary.
In this environment, the Board considered that a 25 bp reduction is consistent with the risks balance, and also with the objective of reaching the inflation target of 3.0% in 2018. Additional reductions will consider the risk balance between a slow convergence of inflation to its 3.0% target and an excessive slowdown of economic activity.
The decision to reduce the benchmark interest rate was approved by four members of the Board. One Board Member voted to keep the benchmark interest rate stable, while another one voted in favor of reducing it by 50 basis points.