Banco de la República maintains the Benchmark Interest Rate at 7.5%

The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.5%. For this decision, the Board mainly took into account the following aspects:

• In December, yearly consumer inflation and the average of core inflation indicators decreased, reaching 5.75% and 5.60%, respectively. Analysts’ inflation expectations to one and two years posted at 4.25% and 3.59%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years increased, posting between 3.8% and 4.8%. 
• The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade. This is suggested by the slowdown in the food CPI, and to a lesser extent, by the recent behavior of the prices that were mostly impacted in the past by the strong nominal depreciation. 
• The new figures of global economic activity for the end of 2016 indicate that the average growth of Colombia’s trading partners would have been higher than estimated a quarter ago. With this, it is likely that the recovery of external demand in 2017 be slightly higher than forecast three months ago. International long-term interest rates increased, and the country's terms of trade continue to recover. In this context, the peso has appreciated versus the US dollar.
• Uncertainty about the international financial and trade conditions has increased since the last Board meeting, with a possible impact on global interest rates and the evolution of the US dollar.
• In Colombia, several of the indicators of economic activity and perception for the fourth quarter of 2016 suggest that the economy exhibited low dynamism, although somewhat better than in the third quarter. With this, the technical staff reduced the most likely growth figure for 2016 from 2.0% to 1.8%, within a range between 1.6% and 2.0%. In 2017, output growth would stand between 0.7% and 2.7%, with 2.0% as the most likely figure.  
• The end-of-the-year figures for foreign trade suggest an adjustment of external balance greater than had been forecast. With this, the new projection for the current account deficit for 2016 stands at 4.5% of GDP, equivalent to US 12.6 billion. 
• Considering the current level of core inflation indicators and inflation expectations, various calculations of the policy real interest rate are above their average since 2005.

In all, the Colombian economy continues to adjust to the strong shocks recorded since 2014, and the current account deficit continues to adjust. Output dynamics has been weaker than had been forecast, and inflation continues to decline, although core inflation indicators and inflation expectations exceed the 3.0% target. The effects of several of the transitory supply shocks that have affected inflation and inflation expectations continue to reverse, and this trend is likely to continue. The tax reform adopted by the Congress favors the productive investment and enables the achievement of higher levels of income in the long term, in addition to consolidating the country's fiscal and external sustainability.

In this context, by assessing the increase in inflation expectations, the higher global uncertainty, and the behavior of domestic demand, the Board deemed appropriate to maintain the benchmark interest rate unaltered, pending new information.

The decision to maintain the benchmark interest rate unchanged was approved by four members of the Board.  The remaining three Board Members voted for a 25 bp reduction of the benchmark interest rate.

Bogotá, D. C.