Banco de la República increases the benchmark interest rate by 25 basis points
The Board of Directors of Banco de la República at today’s meeting decided to increase the benchmark interest rate by 25 bp to 7.25%. For this decision, the Board mainly took into account the following aspects:
- Annual consumer inflation fell in April and stood at 7.93%. In contrast, the average of core inflation indicators increased, reaching 6.38%. Analysts’ inflation expectations to one and two years posted at 4.5% and 3.7%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years are between 4.3% and 4.7%.
- The slight decline of annual inflation in April was explained mainly by decreases in energy prices. However, increases in food prices and the pass-through of nominal depreciation to consumer prices continue to exert inflationary pressures. In spite of being temporary shocks, the intensity of El Niño and the magnitude of the depreciation of the peso have diverted inflation and inflation expectations from the target, and have activated some indexation mechanisms.
- The figures for global economic activity for the second quarter suggest that the dynamics of global output will be greater than in the first. However, it is likely that the average growth of Colombia’s trading partners in 2016 be lower than the one observed in 2015.
- The increase of the benchmark interest rate by the Federal Reserve of the United States could take place before than expected in previous months. In this environment, the peso and other world currencies depreciated. The price of oil continued to increase and continues at levels higher than expected for this year. With this, the fall in the terms of trade and national income could be lower than what had been expected before.
- The information available indicates that in the first quarter household spending grew at a pace similar to that recorded a quarter ago, while investment slowed down. With this, the technical staff continues projecting growth at 2.5% in the first quarter, and throughout 2016 within a range between 1.5% and 3.2%.
In all, the Colombian economy is adjusting in an orderly manner to the strong external shocks recorded since 2014. The risk of an excessive deceleration of domestic demand is moderate, and there is still an excess of expenditure with respect to national income, which is reflected in a high current account deficit. Inflation has accelerated on account of the depreciation of the peso, El Niño, and by the activation of some indexation mechanisms.
In this environment, the response of the monetary policy must acknowledge that the shocks which have affected prices are transitory, while being oriented to ensure convergence of inflation to the target of 3.0% ±1 percentage point in 2017. With this purpose, the Board deemed appropriate to increase the benchmark reference rate by 25 basis points. The adjustment of the monetary policy will also contribute to the correction of the external deficit.
The Board will continue to monitor the expected adjustment of expenditure and its consistency with the income level for long-term sustainability of the external deficit, and, in general, for macroeconomic stability. Similarly, it reaffirms its commitment to keep inflation and inflation expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.
Finally, the Board announced that it will not summon a new auction of options to decumulate foreign reserves, and will continue to use the intervention mechanisms according to their suitability in order to achieve the Central Bank's policy objectives.