Banco de la República reduces the benchmark interest rate by 25 bp to 6.25%

 The Board of Directors of Banco de República (BDR) at today´s meeting decided to cut the policy interest rate by 25 bp to a level of 6.25%. For this decision, the Board considered the following:
 

• In April, the YOY inflation was 4.66% and the average of the core inflation indicators was 5.52%, both figures similar to the March numbers. Market analyst´s inflation expectations for December 2017 and 2018 are 4.45% and 3.57%, respectively. Those implicit in the public debt market registered minor changes and for 2018 are slightly above 3.0%. 
• The effects of the strong temporary supply shocks that deviated inflation from its target continue to fade, as shown, for instance, by the deceleration in food CPI. The average of the core inflation indicators continued falling slowly, impacted by the indexation of prices and wages and by the increase in indirect taxes. 
• Growth of our major trade partners is expected to be somewhat stronger than the one registered in 2016. However, so far this year, uncertainty on the evolution of external demand and commodity prices has increased. 
• In Colombia, economic growth for the first quarter of 2017 was low (1.1%), and somewhat below the forecast of the technical staff of BdR (1.3%). Economic activity indicators so far would suggest a slow dynamics for the second quarter.

With this information in hand, the Board weighed the following elements in its decision:

• An incremental weakness in economic activity and the risk of a deceleration beyond that compatible with the reduction in income that resulted from the oil price shock. Recent figures suggest a larger risk of an increase in excess capacity, though its size is still largely unknown. 
• Uncertainty on the speed of convergence of inflation to its 3.0% target. Inflation remained unchanged and close to the expectations of the technical staff of BdR. Indexation mechanisms and the increase in the persistence of inflation remain present in the evolution of core inflation indicators, and could extend the period of convergence of inflation to its 3.0% target. 
• The current level of the real ex ante policy interest rate is contractionary. 

In this environment, there was consensus among the Board on the convenience of continuing to reduce the policy interest rate. The decision of cutting this rate by 25 bp was approved by 4 of the Board members. The remaining 3 voted for a 50 bp cut. 

Updated: 07/06/2017, 16:18