Banco de la Republica announces inflation target for 2013 and reduces the benchmark interest rate by 25 basis points

In its meeting today, the Board of Directors of Banco de la Republica ratified their commitment to keep the inflation target at 3% and confirmed that the monetary policy measures will continue to be directed towards holding inflation at that value. Low and stable inflation is the best contribution monetary policy can make to sustainable economic growth and the creation of jobs. The 3% inflation also applies in the legal area and the target range is 3% +/- 1 percentage point.

In addition, the Board decided to reduce the benchmark interest rate by 25 basis points.  Therefore, the base rate used in liquidity-expansion auctions is 4.5%. This decision was based on the following considerations:

The international uncertainty is still present. Some international economic indicators have improved a little. The weakness in a significant number of industrialized economies and the lack of inflationary pressure make it possible to expect that foreign interest rates will remain low for an extended period of time.

Colombian growth has slowed down based on rates that were seen to be above their trend levels in the second half of 2011.  After a 4.8% annual growth in the first half of 2012, the recent indicators of activity suggest that growth is moderating slightly more than what was expected. The weakness in the worldwide economy and the slowdown in domestic demand have been reflected in the lower growth in exports and the contraction in industrial output. The forecast range for GDP growth in 2012 is between 3.7% and 4.9% with 4.3% as the most likely result.

In 2013, moderate but sustained growth in the foreign demand for Colombian products, stable levels for international prices and expansive conditions of international liquidity are expected. The reduction in interest rates over the last few months, including the one done today, the stability in the job market and the favorable confidence levels households have will support a recovery of growth in consumption compared to what has taken place in the second half of 2012.  Investment will continue to be driven by public works, the lower interest rates and the expansion of the mining-energy projects.  Thus, a growth rate close to the growth of productive capacity is expected in 2013.

The growth of credit is still slowing down. The price indices for new and used housing are at historically high levels.

Inflation, the average of indicators for core inflation and expectations are very close to the mid-point of the target range (3%).

The greatest risks that could affect the country’s economic activity in 2013 are still a significant recession in Europe or the possibility of a strong fiscal cutback in the United States.

Based on an evaluation of the current balance of risks, the Board of Directors considered it appropriate to reduce the benchmark interest rate to 4.5%.  Based on the current information, this is the interest rate level that is compatible with both growth close to the productive capacity and meeting the inflation target.

The Board reiterates that Banco de la Republica has enough tools and resources to face the liquidity needs regularly required by the economy in both national and foreign currency as well as any that could appear in an environment of international financial turmoil.

The Board will continue to monitor the performance of and projections for economic activity and inflation in the country, the asset markets and the international situation carefully. Finally, the Board restates that the monetary policy will depend on new information available.