Banco de la República increases the benchmark interest rate by 25 basis points

Publication Date:
14:23

The Board of Directors of Banco de la República at today’s meeting decided to increase the benchmark interest rate by 25 bp to 7.75%. For this decision, the Board mainly took into account the following aspects:
 

  • In June, annual consumer inflation and the average of core inflation indicators increased, reaching 8.6% and 6.5%, respectively. Analysts’ inflation expectations to one and two years posted at 4.6% and 3.7%, respectively, and those embedded in public debt bonds (2, 3, and 5 years) remained relatively stable within a range of 4.0% and 4.5%.
  • The strong increase in food prices as well as nominal depreciation and its partial pass-through to consumer prices mainly continue explaining the difference of inflation and the inflation target.  Although El Niño ended and the exchange rate has not exhibited any strong upward trend for a number of months now, the intensity of these shocks produced a deviation of inflation and its expectations from the target, and triggered some indexation mechanisms. The effects of the trucking strike on consumer prices will be felt in July, but it is expected that they fade quickly.
  • Global economic activity remains weak, and it is forecast that the average growth of Colombia’s trading partners in 2016 will be lower than the one observed in 2015. In the United States, the Fed maintained its benchmark interest rate unaltered, and it is likely that strengthening of the monetary policy in that country will be more gradual. The price of oil has fallen, but it remains at levels above those recorded at the beginning of the year. With this, it is likely that deterioration in the dynamics of national income be lower than the estimated a quarter ago. 
  • The most recent figures of economic activity suggest that output growth in the second quarter of 2016 would be similar to that recorded in the first quarter. For 2016, the technical staff revised its forecast of the most likely figure of growth from 2.5% to 2.3%, within a range between 1.5% and 3.0%. These forecasts imply a domestic demand that continues to adjust, partly as a response to the deterioration in the dynamics of national income.   
  • The new figures for foreign trade indicate that the external deficit continued to fall in the second quarter. For all 2016, the technical staff forecasts a further reduction of the current account deficit. In this new forecast, the deficit would be US $15 billion, which would be equivalent to 5.3% of GDP. This behavior reduces the country's vulnerability to adverse external shocks.  

 

In all, inflation rose due to the past depreciation of the peso, the lagged effect of El Niño (which is already over), inflation expectations exceeding the target, and by the activation of some indexation mechanisms. Similarly, the Colombian economy continues to adjust in an orderly manner to the strong shocks recorded since 2014, and the current account deficit is correcting gradually. 
 

In this context, the response of the monetary policy must acknowledge that the shocks that have affected prices are transitory, and seeks to anchor inflation expectations in order to convergence of inflation to the 3.0% target (±1 pp) in 2017. With this purpose, the Board deemed appropriate to increase the benchmark reference rate by 25 basis points. The adjustment of the monetary policy will continue contributing to the correction of the external deficit.
 

The Board of Directors reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation. Similarly, the Board will continue to follow up on the effects of the adjustment of expenditure on inflation. 

 

Bogotá,