The Central Bank of Colombia holds its interest rate steady, reduces bank reserve requirements and adopts other measures to provide liquidity

At a meeting today, the Board of the Directors of the Central Bank of Colombia voted, by a majority, to hold its intervention interest rate steady. Consequently, the base rate for repo auctions will remain at 10%.

Annual consumer inflation at September was 7.57%, which is 30 b.p. less than the rate in August.  This positive outcome was the result of lower food prices, since other items in the market-basket, such as regulated prices, exerted upward pressure. The core inflation indicators were up again, while inflation expectations remained stable. However, they were still above target.

New information confirms that productive activity in Colombia is weakening, particularly in industry and commerce.  The past month saw the international context deteriorate sharply. This has accentuated the restriction on credit worldwide and meant less growth for our major trading partners.   Colombia’s productive sector is also feeling the negative effects of higher costs and the drop in demand.

Asset prices remain extremely volatile and there has been an increase in risk premiums and external interest rates for all emerging market economies.  In Colombia, this phenomenon has been reflected in peso devaluation.

Food prices, peso devaluation and, eventually, elevated wage costs could keep total inflation high in the months ahead. However, the expectation is that weak demand and the recent decline in international commodity prices will mean less inflationary pressure in the future.  To the extent that mid-term inflationary pressures continue to drop, it is appropriate to consider a shift towards a less restrictive monetary policy.

Therefore, to help money and credit markets function properly and to facilitate a suitable supply of liquidity, the Board of Directors decided unanimously to facilitate liquidity management within the financial system during the months ahead by adopting the following measures.

A reduction in bank reserve requirements from 11.5% to 11% for current and savings accounts, and from 6% to 4.5% for term deposits under 18 months.  These reductions will take effect as of the two-week reserve maintenance period that begins on November 19.  This measure is expected to free up nearly one trillion pesos in resources during the month of December.

An extension from two to three weeks in the reserve calculation for the end of the year.

Temporary liquidity granted with repo operations that mature at 14 and 30 days. The amounts will be announced in due course.

The definitive purchase of Col$ 500 billion in TES, plus the peso equivalent of the sale of foreign exchange through the system for call options.

Reverse-repo auctions through remunerated deposits not subject to reserve requirements will be closed temporarily as of Monday, October 27.  The Lombard contraction window will be left open.

The Board will continue to monitor the international situation closely, as well as inflation, economic growth and their forecasts.  It reiterated that monetary policy in the future will depend on the new information becomes available.