Banco de la República Leaves the Benchmark Interest Rate at 3.25%

At its meeting today, the Board of Directors of Banco de la República agreed to leave the benchmark interest rate at 3.25%.  The following relevant factors were considered by the Board in reaching this decision.

• On the international scene, the economic indicators for the first quarter of the year show modest growth in the United States, recession in Europe, and a slight slowdown in China.  In Japan, the central bank announced a strong monetary stimulus program.
• If the current trends in the international economy were to continue throughout the year, terms of trade and average growth for Colombia's trading partners probably will be somewhat less than in 2012. As a result, the external impulse to aggregate spending would not be as much as in past years.
• The first-quarter data suggest economic activity in Colombia has slowed compared to what was observed in 2012. On the demand side, the rate of growth in household consumption would have declined, as evidenced by the changes in the indicators for retail trade, household confidence and credit. On the supply side, the available indicators for industry continue to show deterioration.  United States exports in dollars fell year on year in February, mainly due to mining exports and those affected by supply shocks in the coal sector. In contrast, industrial exports rose at a good pace.
• The recent performance of several components of aggregate spending and the effect of fewer working days in the first quarter compared to the same period last year have made it particularly difficult to interpret current economic trends and to forecast economic activity.  However, increased growth in the economy throughout the year is expected to the extent that aggregate spending reacts to the measured adopted earlier with respect to monetary policy and the programs announced recently by the national government. The Bank's technical team forecasts between 3% and 5% GDP growth for all of 2013, with 4.3% being the most likely figure.
• In March, annual inflation (1.91%) accelerated slightly and there were no significant changes in the measurements of core inflation. The average of these measurements as well as most indicators of inflation expectations are below target (3%).
• By March, the policy interest rate cuts had passed through to the nominal interest rates in the market.  Interest on consumer lending, preferential loans and micro-credit reacted to a similar degree or more than the Bank’s rate, while interest rates on ordinary commercial loans, mortgages and credit card lending were slower to respond. However, recent weeks have seen a significant reduction in interest rates on home mortgages. In real terms, rates have declined less because of the sharp drop in inflation and inflation expectations.
• Growth in the loan portfolio continued to weaken. So far this year, there has been a slowdown in commercial lending in pesos, but an increase in financing through corporate bond issues, together with more external borrowing.  Lending to households (consumer and mortgage loans) also grew less, but at rates superior to those of nominal GDP.
• By December, the price indexes for new and used homes continued to rise at elevated rates, reaching record highs.

In short, the Colombian economy currently is expanding below its potential and inflation is under 3%. The monetary and fiscal policy measures adopted in 2013 will help to place output near the economy’s productive capacity and move inflation towards the long-term target. In this context, an assessment of the risk balance indicates the need to keep the policy interest rate at 3.25%, while awaiting more information.

The Board will continue its careful monitoring of performance and projections with respect to economic activity and inflation in Colombia, asset markets and the international situation.  It reiterated that monetary policy will depend on new information as it becomes available.