Banco de la República holds its interest rate, modifies the exchange intervention scheme, and replaces the marginal reserve requirement with an average reserve requirement of 10%
At a meeting today, the Board of Directors of Banco de la República decided unanimously to leave its intervention interest rate at 9.75%.
Annual inflation was 6.39% in May. This is 66 basis points more than annual inflation in April. The increase was due primarily to the rise in unprocessed food prices because of weather conditions. International food prices remained high and have exerted upward pressure on prices in the family market basket, despite sharp peso appreciation.
The Board noted that core inflation indicators rose in May, as did expectations of inflation, most of which are above target. This confirms that the steep rise in demand in the past needs to be curbed to reduce inflationary pressures and to prevent growth from becoming unsustainable.
Although external conditions remain favorable for economic growth, the indicators available in May suggest the increase in internal demand and output has slowed considerably. This includes the limited growth in commerce and industry, the sharp deceleration in consumer loans, a lower consumer confidence indicator and the scant increase in energy consumption. The effect of supply factors on GDP growth in the first quarter of the year was emphasized, such as the brusque drop in construction of civil works, the Cerromatoso strike and the reduced number of working days.
In view of these factors, the Board believes the Bank’s intervention interest rates, at their current level, are doing what is needed to slow the growth in demand and, therefore, considers it prudent to maintain the current stance of monetary policy. However, if expectations of inflation begin to affect prices and wages, that stance will have to be modified.
The Board decided to step up the accumulation of international reserves throughout the remainder of 2008. To do so, it replaced the current scheme, based on monthly options of US$150 million, with daily purchases of US$20 million through competitive auctions. This reinforces the policy of accumulating international reserves to deal with an eventual deterioration in the international environment. The measure takes advantage of the fact that the exchange rate is currently below sustainable levels.
The monetary effects of this measure will be offset to keep the inter-bank interest rate close to the intervention interest rates. This will be accomplished by eliminating the marginal reserve requirement as of September and raising the ordinary reserve requirement by 10%, on average (11.5% for checking and savings accounts and 6% for time certificates of deposit). Moreover, the Bank will open its contraction windows, if necessary.
The Board will continue to monitor the international situation closely, along with inflation and growth tendencies and their forecasts. It reiterated that monetary policy in the future will depend on the new information that becomes available.
