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

Publication Date:

In a meeting today, Banco de la República’s Board of Directors decided to raise the intervention interest rate by 25 basis points.  As a result, the repo auction base rate will be 3.5%.  This decision was taken in light of the following factors.

  • In February, annual inflation (3.17%) declined after five months of continuous hikes. The drop, which surpassed what the technical team had expected, was concentrated in the variation in prices for perishable foods and regulated items.  For the third month in a row, the various core inflation indicators exhibited relative stability and stayed near or below the mid-point of the target range (3% +/- 1 percentage point).

 

  • The various measurements of inflation expectations at one year are within the target range for inflation. The longer term expectations (five and 10 years), measured by government bonds, declined but are above the ceiling of the target range.  Inflation forecasts for the end of 2011 and 2012 are still near the mid-point of that range.

 

  • Up to now, global economic growth has exceeded expectations. International prices for oil, food and other commodities are at historically high levels and have led to increased prices for consumers in many countries. The central banks in some Latin American countries and in other parts of the world have raised their interest rates. However, the prospects for the global economy are uncertain. Added to the government debt problems in some European countries and to global inflationary pressures associated with the behavior of commodity prices is the uncertainty about the economic consequences of the earthquake in Japan.

 

  • Economic activity in Colombia continues to gain strength. GDP growth during the fourth quarter of 2010 may be more than was expected previously. High prices for the country’s leading export products and more price stability with respect to imported goods have kept terms of trade high and even increased them in some cases.  Consumer confidence, which had been declining after an all-time high in August 2010, has increased again and the job market shows signs of improving to the extent that job creation is concentrated in salaried and formal employment.  In general, internal demand is growing at a good pace and the reasons to expect the economy to reach levels near its potential in the second half of the year are gaining force.

 

  • Interest rates are at historically low levels in nominal and real terms.  Nominal interest rates on deposits and loans in the financial system showed stability during the past month. Lending continues to increase at high rates and home price indicators remain on an upward trend.   Generally speaking, monetary and financial conditions still support the increase in spending and production.

 

Taking all these factors into account and considering the time it takes monetary- policy to affect aggregate spending and inflation, the Board feels it is appropriate and prudent to continue to reduce the monetary stimulus in a gradual way.  The level of Banco de la República’s intervention interest rate continues to support the short-term growth in output and employment.  The intervention rate hikes in February and March will help to make the growth in output and employment more sustainable, to keep inflation within the target range this year and the next, and to preserve the stability of the financial system.  Furthermore, these expected consequences of monetary policy should reduce the level to which the intervention interest rate should increase in relation to the levels observed in previous economic cycles.

The Board will continue to monitor the international situation carefully, along with inflation forecasts and behavior, growth in output and employment, and the asset markets. It reiterated that monetary policy will depend on whatever new information becomes available.

Finally, the Board of Directors highlighted the principal elements that were taken into account by Standard & Poor´s to improve Colombia’s risk rating to investment grade.  Specifically, there is the soundness demonstrated by the Colombian economy in the face of the international crisis and the favorable prospects for mid-term growth, which will help to contain the public debt burden and will allow more room for counter-cyclical monetary and fiscal policies. Investment grade is a major step forward and will offer the country important opportunities for development.

Bogotá, Colombia