Banco de la República maintains the benchmark interest rate at 4.5%

The Board of Directors of Banco de la República, in its meeting today, decided to maintain the benchmark interest rate at 4.5% For this decision, the Board mainly took into account the following aspects:

• In the first two months of 2018, yearly inflation and the average of core inflation indicators fell slightly more than expected, and stood at 3.37% and 3.96%, respectively, in February. In this period, the food and tradable CPI excluding food and regulated items were the groups with the largest decreases in their annual variation. 
• The direct effects that the increase in taxes at the beginning of 2017 had on inflation are fading, and have been reflected in the reduction of inflation. Some of the most indexed and labor-intensive groups such as education and health, exhibited increases well-over the target. 
• Inflation expectations recorded slight changes. Those by analysts to December 2018 and 2019 stand, on average, at 3.35% and 3.28%, respectively. Those embedded in public debt bonds remain above 3.0%.
• External demand continues to recover, driven by developed economies and by the major emerging economies. The price of the US dollar and the region's risk premia, including Colombia, have been relatively stable. Oil prices remain at levels higher than the averages registered in the last two years.
• GDP growth for 2017 was 1.8%, higher than projected by the technical staff of the Central Bank (1.6%), and for the last quarter (1.6%), was lower than had been estimated (1.8%). The indicators of economic activity available so far this year suggest that the economy would have continued with a low growth, albeit higher than in 2017. With these results, the technical staff of the Central Bank maintained its growth estimate at 2.7% for 2018. The recovery in external demand, better terms of trade, the impact of the reductions in interest rates, and investment in civil works would support the acceleration of GDP.
  
  

The upward revision of GDP in 2017 by DANE suggests a degree of under-utilization of installed capacity in the economy somewhat lower than previously estimated. However, the Bank's technical staff considers that it would expand in 2018, given that growth forecasts would be lower than its potential.

• In 2017, the current account deficit declined more than estimated, standing at 3.3% of GDP. The recovery in external demand, the increase in the price of oil, and the weakness of domestic demand contributed to this adjustment.

Based on this information, the Board considered the following factors for its decision:

• Despite the favorable behavior of the CPI, the inertia in the inflation rate for some items and a less favorable behavior in food inflation could affect expectations and delay the convergence of inflation to its 3.0% target.
• The prolonged weakness of economic activity, the widening output gap, and uncertainty regarding its pace of recovery.
• Some indicators suggest that a 4.5% reference interest rate is slightly expansionary.
  
  

The Board will continue to carefully monitor the behavior of inflation and the forecasts for economic activity and inflation in the country, as well as the international context. Finally, the Board reiterates that the monetary policy will depend on the availability of new information.

The decision to maintain the benchmark interest rate at 4.5% was approved by six (6) members of the Board. The remaining Board Member voted for a 25 bp reduction.