Banco de la República keeps the Benchmark Interest Rate at 4.5%

The Board of Directors of the Central Bank of Colombia at today´s session decided to keep the benchmark interest rate at 4.5%. In order to reach this decision, the Board considered the following issues:

• The new projections of the economic activity worldwide for what remains of 2014 and 2015 suggest that the average growth of our commercial partners will be less than had been estimated.  External demand would be propelled mainly by the economy of the United States of America, while a low dynamism is expected for the euro zone. China would experience a slowdown, while some countries which are partners in the region will continue to grow at lower rates than their averages in recent years.
• The risk primes in several emerging countries have deteriorated, and their currencies have depreciated against the US Dollar.  This has taken place in an environment of slowdown of their economies, as well as of a downturn in the prices of the basic goods that they export.
• The international price of oil has plummeted, and is now below the forecast by the technical staff. This has implied a deterioration of the terms of trade of the country, although the international quotes for coffee remain high, and the fact that the prices of other basic goods imported by Colombia have fallen. Should the terms of trade keep falling, the growth of the national income will be affected negatively.
• In Colombia, the new indicators suggest a growth of the GDP in the third quarter of 2014 similar to the one projected in prior months. The behavior of retail sales and consumption credit, as well as of the index of consumer confidence and that of the labor market, indicate that consumption would maintain a strong dynamics. The increase of the external purchases of machinery and transportation equipment, as well as the trend registered by civil works, foretell a good performance of the investment, although at lower rates than those observed in the first semester. The foreign trade indicators suggest that net exports would contribute negatively to growth. For 2014, the technical staff estimates a growth rate between 4.5% and 5.5%, with 5%, as the most probable figure.
• Annual inflation in September, 2.86%, was in line with the expectations of the technical staff. The average of the four basic inflation indicators descended and posted at 2.63%. Estimations suggest that by the end of the year inflation could be posting in the upper half of the goal range.
• The average of inflation expectations produced by analysts for one year, as well as those arising from public debt bonds for longer terms, remain stable and somewhat above 3%.

In summary, the aggregate demand continues to show a strong growing trend in a context that is close to the full use of the productive capacity. At the same time, the inflation expectations remain close to 3%. The aforesaid takes place within an environment of deterioration of the terms of trade together with a growing uncertainty regarding the recovery of the economic activity worldwide and the cost of external financing, which are factors that may affect aggregate demand as well as  the exchange rate. Having assessed the risk balance, the Board of Directors deemed appropriate to keep the interest rate of reference unaltered.

The Board will continue to carefully monitor the behavior and projections of the economic activity and inflation in the country, as well as those of the asset markets and the international situation. Finally, the Board reiterates that the monetary policy will depend on the information available.

Thursday, 30 October, 2014