Banco de la República reduces the benchmark interest rate by 25 bp to 5.5%
The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 5.5%. For this decision, the Board mainly took into account the following aspects:
- In June, annual consumer inflation stood at 3.99%, and the average of core inflation indicators posted at 5.09%. These figures are lower than those registered a month ago. Analysts’ inflation expectations to December 2017 and 2018 lowered, reaching 4.28% and 3.52%, respectively. Those embedded in public debt bonds recorded modest changes, and are slightly above 3.0% for 2018.
- The effects of the strong transitory supply shocks that deviated inflation from its target continue to fade. This is suggested by the slowdown in the food CPI and the behavior of the prices which are more sensitive to the exchange rate. The average of core inflation indicators declined more slowly as a consequence of the indexation of prices and the effect of the transitory increase in indirect taxes.
- The contribution of food CPI to the decline in annual inflation may reverse during the second half of this year. For this reason, forecasts indicate that annual inflation could increase slightly in that period.
- Forecasts for the price of oil and the terms of trade for the rest of 2017 lowered, but continue to reflect increases versus the averages recorded in 2016. External demand remains weak, and its growth is expected to be somewhat higher than the figure registered a year ago. In the last month, country risk spreads were relatively stable, and the peso depreciated vis-à-vis the US dollar.
- Recent figures of economic activity for the second quarter suggest that output would have grown at a low rate, similar to the one recorded in the first quarter. The dynamics of domestic demand would have been weak, although somewhat better than three months ago. Net exports would have been similar to those of the first quarter of 2017.
Based on this information, the Board considered the following factors for its decision:
- The increasing weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the dynamics of income due to the fall in oil prices. Recent indicators confirm an excess capacity of the economy, although its magnitude is highly uncertain.
- Uncertainty about the pace of convergence of inflation to its 3.0% target. Indexation mechanisms and the persistence of inflation continue to be reflected on core inflation indicators, which exceed the inflation target (3.0%).
- The current level of the real policy interest rate ex-ante is contractionary.
With this, the Board of Directors decided to reduce the benchmark interest rate by 25 bp. The decision to reduce the benchmark interest rate was approved by six (6) members of the Board. The remaining member voted not to modify the benchmark interest rate.