The Board of Directors of Banco de la República at today’s meeting decided to increase the benchmark interest rate by 50 bp to 7.0%. For this decision, the Board mainly took into account the following aspects:
In March, annual consumer inflation and the average of core inflation measures increased and stood at 7.98% and 6.29%, respectively. Analysts’ inflation expectations to one and two years registered 4.5% and 3.8%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years are between 4.4% and 4.8%.
The strong increase in food prices as well as nominal depreciation and its partial pass-through to consumer prices continue explaining the increase in inflation. Although they are considered temporary shocks, the magnitude of the depreciation of the peso and the intensity of El Niño have increased the risk of a slower convergence of inflation to the target, due to its direct impact on prices and inflation expectations, as well as to the triggering of indexation mechanisms.
The new information on global economic activity suggests that in 2016, average growth of the country's trading partners will be weak and lower to the one registered in 2015. In the United States, the Federal Reserve maintained its benchmark interest rate unaltered, and a slower tightening of monetary policy in that country is more likely. The price of oil increased, and posted above the expectations of the technical staff for this year. In this environment, risk measures for the country fell, and the peso appreciated vis-à-vis the US dollar.
The data for the first quarter of 2016 indicates that consumption grew at a rate similar to the one registered a quarter ago, and that investment slowed down. On the supply side, indicators of industry, retail trade, and coffee production suggest a favorable behavior, while mining reported deterioration. Under these conditions, for the first quarter of this year, the technical staff forecasts a most probable growth figure of 2.5%, within a range of 1.8% to 3.2%. For all 2016, the growth forecast would be between 1.5% and 3.2%, with 2.5% as the most likely outcome.
For 2016, a reduction in the current account deficit both in US dollars (15,948 million) and as a proportion of GDP (5.9%) is expected.
In all, high increases in food prices and partial pass-through of depreciation to domestic prices continue to exert inflationary pressures. Inflation expectations remain high. This takes place within a context of excessive expenditure over national income, and in which the risk of an excessive deceleration of domestic demand continues to be moderated. In order to ensure convergence of inflation to the target in 2017, and to contribute to the reduction of the current account deficit, the Board of Directors decided to increase the benchmark interest rate by 50 bp.
The Board will continue monitoring 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 maintaining inflation and inflation expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.