Banco de la República holds its intervention interest rate steady

At a meeting today, the Board of Directors of Banco de la República decided to leave the intervention interest rate unchanged.  As a result, the repo auction base rate will remain at 3%.  This decision was taken in light of the following factors.

• Annual consumer inflation in 2010 was 3.17%, which is near the middle of the long-term target range set by the Board of Directors (3% +/- one percentage point).
   
• Inflation in December was higher than anticipated by the market and by Banco de la República’s technical team. The larger than expected variation in prices occurred in food and regulated items.  The core inflation indicators also rose, but not as much, and are still below the mid-point of the target range.
   
• The various measurements of one-year inflation expectations increased and were in the upper half of the target range for inflation.  The longer term expectations (five and 10 years), derived from government bonds, showed rates above the ceiling the range. However, it is important to note the recent rise in inflation is due largely to a temporary shock affecting food prices.
   
• As for external demand, the economies of our major trading partners are growing slightly more than was expected, although there is still a great deal of uncertainty about how some of them will perform in the future.  At the same time, the Asian and Latin American countries are showing strong growth and price pressures. Some of their central banks have hinted at changes in the stance of their monetary policy.  International commodity prices are at historically high levels.
   
• Growth in the Colombian economy during the second half of 2010 was less than predicted several months ago.  Basically, this is explained by the behavior of investment in civil works and the effects of La Niña weather on agricultural output, mining production and transport.  In contrast, household consumption and borrowing increased at high rates, as did corporate borrowing and investment in machinery and equipment.  The latter is partly the result of historically low nominal and real interest rates, consistent with a weaker global and national economy than what we are seeing and is now being forecast.
   
• Factors such as the momentum in household consumption, high terms of trade, low interest rates and mounting credit will bolster economic growth in 2011. If the economy remains on an upward path, as anticipated, or inflation expectations show signs of deviating from the targets, conditions will be right for gradually withdrawing monetary stimulus in an effort to strengthen the sustained growth in production and employment.
   

The Board of Directors will continue to keep a close eye on the international situation, inflation forecasts and behavior, growth and the performance of asset markets. It reiterated that monetary policy will depend on whatever new information becomes available.

Bogotá