Banco de la República Hold the Intervention Interest Rate Steady

At its meeting today, the Board of Directors of Banco de la República (the Central Bank of Colombia) agreed to hold the intervention interest rate steady at 5.25%. This decision was taken in light of the following considerations.

• On the external front, GDP in the Euro zone did not fall during the first quarter of 2012. This better-than-expected outcome was due to German economic growth, which offset the GDP declines in the rest of the zone.  During the same period, Japan and to a lesser extent the United State posted higher growth rates than anticipated.  In the large emerging market economies, such as China, Brazil and India, there has been more of a slowdown than expected.

•  May saw a significant rise in the uncertainty as to whether or not Greece will remain in the Euro Zone.  Coupled with other financial and political events in Europe, this raised international risk premiums, having a negative impact on stock markets and weakening the currencies of the emerging countries, including the Colombian peso.

• The recent events in Europe increased the risk of a severe recession on that continent, amidst an environment where the financial system is fragile and the economies in question have little fiscal and monetary leeway to deal with recession. The rise in the likelihood of this scenario boosted the uncertainty surrounding the central forecasts for Colombian growth.

• The international price of oil fell below what was expected a month ago.  Even so, terms of trade remain high and are bolstering the growth in national income.

• Economic growth in Colombia during 2012 is expected to be somewhere between 4% and 6%. The momentum in private demand will continue to be the main source of that growth, both in terms of household consumption and investment.   The figures at hand throughout the year point to more moderate growth household consumption and investment, which is in line with the growth forecast for the year as a whole.

• The increase in the commercial loan portfolio slowed, due to less growth in loans in foreign currency. The increase in lending to households remains high, especially in the case of consumer loans.  However, the quality of the latter has deteriorated.

• Annual inflation in April (3.43%) was slightly less than estimated and similar to the rate posted the month before.  The averages for the core inflation measurements and inflation expectations rose slightly, although the risks to inflation are moderate.

• Based on an assessment of the balance of these risks, the Board of Directors decided to hold the intervention interest rate steady.  Any new monetary-policy action will depend on the information that emerges.

• The Board of Directors reiterated that Banco de la República has sufficient tools and resources at its disposal to deal with the economy’s regular liquidity needs in domestic and foreign currency and with those that might arise in an environment of international financial turbulence.

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

Bogotá