Banco de la Republica, the Central Bank of Colombia, is keeping unaltered the intervention interest rate

Publication Date:

The Board of Directors of Banco de la Republica, the Central Bank of Colombia, decided today to maintain its intervention interest rate unaltered at 4.75%. This decision was made in taking the following into account:

 

  • International financial markets continue to show high volatility levels as a consequence of their difficulties relating to sovereign debt in Europe. On the other hand, United States economy is expanding at a moderate rate and it is expected to continue behaving in the same way for a long period.

 

  • The Eurozone is likely to contract in the last quarter of 2011 and the first half of 2012, affecting in a negative manner other world regions. There is great uncertainty with respect to the magnitude of the Eurozone contraction and its effects worldwide.

 

  • International commodity prices remain at high levels, thus fostering the national income of the producing countries.

 

  • In Colombia, the new economic activity information, particularly with respect to civil works, suggests that GDP growth in the third quarter will exceed 6%. The new data do not contribute to changing the 2011 and 2012 growth predictions published in the last Inflation Report.

 

  • Bank credit is growing at a high rate and seems to be accelerating. Consumer credit behavior suggests that households are significantly enhancing their degree of leverage. New and used housing price indexes are keeping the same maximum records.

 

  • Between January and November, the GDP accumulated variation was 3.29%. With this figure, the likelihood of inflation standing below 4% by the end of the year is very high. Inflation expectations have shown a slight reduction after the intervention rate increase decided at the Board’s meeting in November. Base inflation measures remain upward, and most of them exceed 3%.

 

The highest risk in core growth predictions would be a disorderly adjustment in Europe. Should this risk materialize, the world economy would grow significantly less than expected; international prices of basic goods would fall and global risk aversion might worsen, all of which would seriously affect Colombian economy. On the other hand, the main risk with respect to inflation comes from excessive demand expansions or cost increases higher than expected, with intense and lasting effects on the monetary policy expectations and credibility. In a longer time horizon, excessive credit growth and the persistence of low interest rates might be the source of financial unbalances with negative effects on the sustainability of economic growth.

According to the present risk balance, the Board of Directors has decided to keep the Bank’s intervention interest rates unaltered. Currently, this balance is very sensitive to the new information obtained regarding both world and local economies.

The Board will continue to carry on its careful monitoring of the international situation along with inflation behavior and projections, growth, and the behavior of asset markets, while reiterating again that its monetary policy will depend on the new information available.

Bogotá