The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%

The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%.

The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%. For this decision, the Board mainly took into account the following aspects:

• In September, annual consumer inflation and the average of core inflation indicators decreased, reaching 7.27% and 6.29%, respectively. Analysts’ inflation expectations to one and two years posted at 4.23% and 3.65%, respectively, and those embedded in 2, 3, and 5 years public debt bonds are around 3.6%.

• The effects of the strong transitory supply shocks that diverted inflation from the target are beginning to fade at a pace slightly higher than expected. This is suggested by the slowdown in the CPI for food and the recent behavior of prices more impacted by the strong nominal depreciation in the past. 

• Global economic activity has been somewhat weaker than estimated, and it is likely that it will register a slight recovery in 2017. A gradual tightening of the US monetary policy is still projected. The price of oil remains above the levels recorded at the beginning of the year, and the prices of some international commodities imported by Colombia have fallen. With this, the terms of trade increased in the third quarter, but remain low, close to the average observed in 2015. 

• The economic activity indicators for the third quarter, some of them heavily affected by the trucking strike, suggest that economic growth will be lower than the one recorded in the first half of the year. The technical staff reduced the most likely growth figure for 2016 from 2.3% to 2.0%, with a new range projected between 1.5% and 2.5%. 

• The new figures for foreign trade indicate that the external deficit continues to adjust. For 2016, the technical staff reduced the projection of the current account deficit to 4.7 percent as a proportion of GDP (equivalent to US 13.2 billion).   

In all, the Colombian economy continues to adjust to the strong shocks received since 2014, and the current account deficit is narrowing gradually. The dynamism of output has been weaker than projected, inflation has lowered, but inflation expectations exceed the target. The effects of the transitory supply shocks that have affected inflation and inflation expectations have begun to reverse, and this trend is expected to continue. In this context, the monetary policy actions undertaken so far contribute to the convergence of inflation to its target.

In this environment, after assessing the risk balance for inflation and growth, the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered. New data on the behavior of prices and aggregate demand will provide more information about the speed of the expected convergence of inflation to the target, and the intensity, nature, and persistence of the economic slowdown.

The Board considers that, given the negative effects of the fall in oil prices on public finances, the structural tax reform bill presented by the Government to the Congress is a crucial action that contributes to long-term growth, to strengthen fiscal sustainability, to maintain macroeconomic stability, and to preserve the credit rating.     

The Board will continue to monitor the adjustment of expenditures and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, the macroeconomic stability. Also, it reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.

The decision to maintain the benchmark interest rate unaltered was reached unanimously.

Bogotá.