The Central Bank of Colombia Holds its Intervention Interest Rate Steady

At a meeting today, the Board of Directors of the Central Bank of Colombia unanimously decided to make no change in its intervention interest rate. Accordingly, the repo auction base rate will remain at 10%.

Annual inflation in July was 7.52%, which is 34 bp above the rate in June. The build-up was due primarily to higher food and regulated prices. A number of core inflation indicators also rose during July.

In contrast, expectations of inflation at different horizons, measured on the basis of the domestic government bond market (TES), declined sharply after the decision taken by the Board of Directors at its meeting in July. The recent decline in long-term interest rates is also an important factor. Non-tradable inflation without food and regulated prices registered at 15 bp decline in July.

Loan portfolio growth during August was similar to what it was in July, registering an annual increase of nearly 18%. Real interest rates on lending (non-food CPI deflated) declined slightly, and the peso has depreciated against the dollar in recent weeks.

Growth in the world economy is declining significantly. The slowdown in Europe and Japan has been sharp. The United States economy is expanding at a slightly higher rate than was forecast last month, but is expected to grow less in the coming quarters. There also is evidence of less growth in a number of emerging market economies.

The information on hand reflects more moderate growth in internal demand and output in Colombia as well. Tighter financial conditions and the impact of higher food and fuel prices on real available income have curbed the growth in demand. Supply, in turn, has been negatively affected by higher production costs, which reduce production growth and elevate prices.

Inflation is still on the rise in many countries, and various central banks have raised their interest rates. International prices for oil, food and other commodities fell recently, but are still historically high.

In short, the economy is expected to grow by 3.3% to 5.3% in 2008. Annual inflation is likely to remain high in the months ahead, due to high food and fuel prices. Later on, total inflation and core inflation indicators may decline gradually, as a result of less growth in demand, provided expectations of inflation remain low and wage increases are moderate.

In view of the foregoing, the Board of Directors decided to hold its intervention rate steady. In addition, it will continue to keep a close eye on the international situation, as well as inflation, economic growth and their forecasts. It reiterated that monetary policy in the future will depend on whatever new inflation becomes available.

Bogotá