The Central Bank of Colombia Lowers Its Intervention Interest Rate by 50 Basis Points

At a meeting today, the Board of Directors of the Central Bank of Colombia unanimously agreed to lower its intervention interest rate by 50 basis points. This places the repo auction base rate at 9.50%

The world economy is in a sharp decline.  Most of the developed economies show signs of contraction, while the emerging market economies continue to grow, but at a slower pace. World inflation will be much less in 2009 insofar as the world economy expands at a rate below its long-term tendency and international commodity prices decline.  If the exchange rate remains stable and an appropriate commercial policy is applied, particularly with respect to food imports, this reduction in international inflation should pass through relatively quickly to consumer prices in Colombia.

The new figures at hand confirm the weakening in productive activity, predominantly in industry and commerce.  Household and business confidence has been affected by external and internal factors. As a result, growth in internal demand is expected to be low.  Added to this situation are the difficulties experienced by Colombia’s major trading partners and the drop in international prices for our main exports. Weaker growth in demand and output means less inflationary pressure.

Annual consumer inflation declined in November from 7.94% to 7.73%.  Although this is still a very high rate, it is expected to continue to drop towards the target range set for 2009, which is 4.5% to 5.5%.

The last few weeks have witnessed an improvement in the region’s access to external financing.  Long-term interest rates have declined and the loan portfolio held by the financial system continues to show momentum.

The intervention rate cut consolidates a change in monetary policy stance that has been in the works for several months.  The possibility of continuing to relax the country’s monetary policy in 2009 will depend essentially on whether inflation behaves as anticipated and on expectations with respect to the targets.

The Board will continue to monitor the international situation carefully, as well as the forecasts for inflation and growth.  It reiterated that monetary policy in the future will depend on whatever new figures become available.