Banco de la Republica keeps the benchmark interest rate at 3.25%

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

• Worldwide economic growth continues to be modest and there are significant differences between countries.  While the economic contraction in Europe still persists, a rapid recovery in productive activity can be seen in Japan.  In the United States, the improvement in private demand is being partly offset by the fiscal consolidation and has led to a slight decline in the projected growth.  The expansion in a large number of the emerging economies in Asia and Latin America remains robust but at a lower level than was projected.  As a result, the growth of our trading partners and the level of the terms of trade are expected to be lower this year than those in 2012.
• The rise in the dollar and the upswing in long term foreign interest rates that were seen in May and June pulled back partly in July.  The same thing was seen in the risk premiums and in the interest rates of public debt securities from the region.
• In the second quarter of 2013, the higher production of petroleum, nickel-iron and coffee and the increase in the growth rate for dollar denominated foreign sales of industrial products suggested a better performance for exports.  The upswing in consumer confidence and the higher pace of growth in retail sales also indicate somewhat of a rise in private consumption.  In the area of supply, the upswing in the economy was mainly due to mining, agriculture, and commerce.  Industry may  contract again although less sharply.  Based on the above, the technical team estimates that growth in the second quarter will be between 2.5% and 4.0% with 3.4% as the most probable figure.
• The  technical team at the Bank lowered their most probable growth forecast for 2013 from 4.3% to 4% with a range of 3.0% to 4.5%.  This reversal can be partly explained by the performance seen in the global economy and in private expenditures, which have been weaker than expected.  Colombian economic growth is expected to rise over the course of the year to the degree in which aggregate expenditures react to the monetary policy measures taken earlier and the programs the national government has been implementing.
• 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 drop and in real terms they are below their historical averages (with the exception of credit cards).
• In June, the annual inflation rate (2.16%) and the average for core inflation (2.5%) was slightly higher than it had been last month.  The average of the inflation expectations held by the analysts and that calculated based on the government bonds is similar to the inflation target of 3%.

To summarize, the economic activity indicators and the forecasts show a level of output that is lower than what could be generated with the installed capacity.  The monetary and fiscal policy measures carried out so far are expected to contribute to making the output grow at a better rate for the rest of the year.  Inflation is low and expectations for it are anchored to the long term target.

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 the new information available.