The Board of Directors of Banco de la República at today’s meeting confirmed the inflation target at 3.0% and decided to maintain the benchmark interest rate at 7.75%

The Board of Directors of Banco de la República, in accordance with Act 31 of 1992, confirms that the inflation target is 3.0%, and reiterates that the monetary policy actions undertaken so far are aimed at driving inflation to a range of 3.0% ± 1 pp in 2017 and consolidate its convergence to 3.0%. A low and stable inflation is the best contribution that monetary policy can provide to sustainable growth of output and employment.

The Board also decided to maintain the benchmark interest rate unaltered at 7.75%. For this decision, the Board mainly took into account the following aspects:
 

• In October, yearly consumer inflation and the average of core inflation indicators decreased, reaching 6.48% and 6.03%, respectively. Analysts’ inflation expectations to one and two years posted at 4.18% and 3.57%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years are between 3.9% and 4.2%.
• The effects of the strong transitory supply shocks that diverted inflation from the target are beginning to fade at a slightly higher pace than expected. This is suggested by the slowdown in the food CPI and the recent behavior of the prices that were mostly impacted in the past by the strong nominal depreciation. 
• Global economic activity remains weak, and it is likely that it will register a slight recovery in 2017. A gradual tightening of the US monetary policy is projected. Due to the increased global uncertainty, the US dollar has strengthened, long-term interest rates have increased, the international price of oil declined, and the risk measures for the major Latin American economies, including Colombia, increased. In this environment, the country's external financing has become more expensive, and the Colombian peso has depreciated. 
• Economic growth for the third quarter was lower than expected. This result and the new figures of economic activity for the fourth quarter suggest that growth in 2016 would be close to 2.0%.  
• The new figures for foreign trade suggest that the external balance is adjusting in line with the forecast of the technical staff of the Central Bank (a current account deficit in 2016 of 4.7% of GDP, equivalent to US 13.2 billion).   

In all, the Colombian economy continues to adjust to the strong shocks received since 2014, and the current account deficit is narrowing gradually. The dynamics of output have been weaker than forecast, and inflation continues to decline, although the core inflation measures and inflation expectations to a year still exceed the target; also, recent changes in the international context have led to a depreciation of the peso. The effects of several of the transitory supply shocks that affected inflation and inflation expectations continue to reverse, and this trend is expected to continue. The monetary policy actions undertaken so far reinforce the process of convergence of inflation to the target and reaffirm the commitment of the Board to reach the 3.0% ± 1 pp range in 2017.

In this environment, upon assessing the risk balance for inflation and growth, the majority of the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered. New data on the behavior of prices and aggregate demand will provide more information about the speed of the expected convergence of inflation to the target, and the intensity, nature, and persistence of the economic slowdown.

The Board considers that the structural Tax Reform Bill submitted by the Government to the Congress is a crucial action that contributes to fiscal sustainability and long-term economic growth. Should the tax reform not be approved, this would compromise the credit rating of the country, which would produce inflationary effects associated with a greater depreciation of the peso. 

The Board will continue to monitor the adjustment of expenditures and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, the macroeconomic stability. Also, it reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.

The decision to maintain the benchmark interest rate unchanged was approved by five Board Members. The remaining two members of the Board voted for a 25 bp reduction of the benchmark interest rate.

Bogotá,