Banco de la Republica leaves the benchmark interest rate unaltered

In their meeting today, the Board of Directors of the Banco de la Republica decided to leave the benchmark interest rate at 3.25%. In making this decision, the Board took the following relevant aspects into account:

• The global economy continues to show mixed signals. While the contraction in Europe is likely to persist longer than what had been expected before, the outlook in the United States and Japan is more favorable. The growth of a significant number of the emerging economies in Asia and Latin America is robust but lower than what was projected a few months ago.
• The Federal Reserve's announcement of the possible reduction in the amount of asset purchases increased the volatility in the international financial markets.  In contrast to the low level they were previously at, the long term interest rates of the bonds issued by both the advanced and emerging economies have risen. The prices of stocks have fallen and the dollar has been strengthened. The reaction of the markets has been sharper in emerging countries.
• The trend in the prices for the main commodities exported by Colombia suggests that, for the current year, the level of the terms of trade will be favorable but lower than the average registered in 2012.
• In the domestic context, the GDP growth for the first quarter of 2013 (2.8%) was equal to that estimated by the technical team. The internal demand slowed down due to a lower growth in consumption that was partially offset by stronger growth in the investments in construction of buildings and civil works. For the second quarter, the figures for industry and commerce, consumer confidence, and the production of petroleum and coffee suggest a growth that is higher than what was registered in the first three months of the year.
• With respect to credit and financing costs, the volatility in the international markets has been reflected by an increase in the interest rates of both government and private corporate bonds. The growth of commercial loans denominated in national and foreign currency is showing signs of stabilizing at a rate that is higher than the nominal GDP growth. The loan interest rates continue to decline and in real terms they are below their historical averages (with the exception of credit cards).
• In general, the economic growth of Colombia is expected to increase throughout the year as long as the aggregate expenditure reacts to decisions made previously on monetary policy and to programs that the national government has been implementing. The Bank's technical team is maintaining their GDP growth forecast for 2013.  This forecast is 3.0% to 5.0% with 4.3% as the most likely figure.
• In May, the annual inflation (2%) was similar to that in April. The average core inflation declined and stood at 2.4%. The average of the inflation expectations held by the analysts and those calculated based on the public debt securities are similar to the inflation target of 3%.

To summarize, the growth of the Colombian economy in the first quarter was low and equal to the projections.  The monetary and fiscal policy measures implemented so far are expected to contribute to putting output close to its potential level for the rest of the year. Likewise, the probability that inflation will end up within the target range is high.

In this context, and based on an evaluation of the balance of risks, the Board of Directors considered it appropriate to keep the benchmark interest rate at 3.25%.

The Board of Directors will continue to monitor the performance and projections for economic activity and inflation in the country, the asset markets, and the international situation carefully. Finally, they reiterate that the monetary policy will depend on new information available.