Banco de la República Raises the Intervention Interest Rate by 25 Basis Points

Publication Date:
12:43

At a meeting today, Banco de la República’s Board of Directors agreed to an increase of 25 basis points in the intervention interest. Accordingly, the repo auction base rate will be 3.25%. 

The intervention rate was reduced sharply and quickly at the end of 2008 and throughout 2009, given the economic slowdown anticipated due to the effects of the global economic crisis. In April 2010, the Board felt there was room for a further reduction of 50 basis points without jeopardizing the inflation targets. This placed the intervention interest rate at a historically low level in both nominal and real terms. However, the reasons for keeping this rate so low are no longer applicable. With the good momentum in internal demand and lending, near tendency growth expected for 2011, an inflation forecast close to the middle of the long-term target range, and above-target inflation expectations at more than one year, the Board felt it was prudent to begin to reduce the monetary stimulus in a gradual way. At 3.25%, the intervention rate continues to support the increase in output and employment, and contributes to its sustainability, while keeping inflation within the long-term target range. 

The historically low nominal and real interest rates have been accompanied lately by an important upsurge in the growth in lending. Housing prices have been on the rise for some time. The need to protect ourselves against the risk of future financial imbalances that might adversely affect output growth and inflation suggest the intervention interest rate should not be kept extremely low for too long a period of time. In addition, the peso exchange rate against the dollar has been stable in recent weeks. 

More specifically:

  • Annual consumer inflation was 3.40% in January, which is similar to what the market expected and 23 basis points more than in December. As was observed in the two previous months, most of the pressure came from prices for food and regulated items, especially fuel. 
     
  • The core inflation indicators remained stable, and their average is still within the lower half of the target range. The inflation forecasts made by the Bank’s technical team for the end of 2011 and 2012 show inflation fluctuating at around the middle of the target range. (3% +/- one percentage point). 
     
  • Inflation expectations have increased during the last three months. This continued to be the case in February, even though the outcome for inflation the month before was in line what the market expected. Although inflation expectations at one year were in the upper half of the target range, those at two to 10 years, measured with government bonds, completed two straight months above the ceiling of that range. 

 

  • As for the external context, recent data suggest close to 5% growth in the global economy during 2010. Moreover, the forecasts for global growth in 2011 and 2012 have been revised upwards at rates that still exceed average long-term growth. Growth in most of the emerging economies is high and, in some of them, the central banks have raised interest rates to prevent inflation from getting out of hand. 

 

  • The risks in the global economy cannot be ignored. Specifically, there is the continuing uncertainty sparked by the fiscal situation in several industrialized countries and, in recent weeks, the sharp rise in international oil prices due to political instability in the Middle East. Moreover, weather factors and the considerable momentum in the emerging economies have added to inflationary pressures in those countries, particularly due to the recent increase in commodity prices.

 

  • The economic recovery in Colombia continues on a path similar to what was forecast by the technical team. Internal demand is exhibiting a great deal of momentum associated with household consumption as well as investment in machinery and equipment. Public spending is expected to make more of a contribution in 2011 than in 2010. This is consistent with what is observed during periods before local administrations are about to leave office and with the programs instituted to repair the damage caused by the wave of winter weather. 

 

  • In general, Banco de la República’s technical team expects the economy to grow by about 4.5% this year, as more moderate growth during the second half of 2010, partly because of supply factors, will result in approximately 4% growth for that year. With some surplus capacity in the first six months of 2011, the Bank’s technical team still expects the economy to return to near- productive- capacity levels during the second half of 2011. 


Finally, the Board of Directors decided to extend its foreign currency purchase program. To do so, it will purchase a minimum of US20 daily up until at least June 17, 2011. 

The Board of Directors will continue to monitor the international situation closely, along with inflation forecasts and behavior, growth, and asset market performance. It reiterated that monetary policy will depend on whatever new information becomes available.

Bogotá, Colombia