Banco de la República Holds Its Intervention Interest Rate Steady

In its meeting today, the Board of Directors of the Banco de la Republica kept its benchmark interest rate unaltered.  As a result, the base rate for liquidity-expansion auctions will remain at 3%.  The decision was made with the following in mind:

• The annual consumer inflation was 2.28% in September, an amount that was lower than was expected by the market and the technical team at the Banco de la Republica.  This result is in line with the predictions made by the technical team that show, with a high degree of confidence, that inflation at the end of 2010 will be in the lower half of the long term target range (3% +/- 1pp).

• The core inflation indicators (the ones that exclude the prices for the most volatile products such as food) remained low and stable as did inflation expectations.

• The information on the Colombian economy that was received in the last few weeks shows some indicators getting stronger and suggests that it is growing at the pace predicted a couple of months ago.  The performance continues to be driven by consumer confidence, the high terms of trade, the strengthening of business investment and the recovery of the financial system portfolio.  A growth similar to what has been seen in 2010, close to 4.5%, is expected for 2011.

• Recently, the nominal interest rates in the financial system have continued to drop.  Specifically, the average interest rate for bank loans has gone down 41 bps in the last month.

• In Europe and the United States the outlook for growth in the short term is still modest.  In contrast, Asia and Latin America are showing a better pace and outlook for growth.  The international prices for the raw materials that are the most relevant to Colombia have not changed much recently and remain at historically high levels. 

• The Board of Directors believes that the posture of monetary policy has contributed to economic growth without jeopardizing the possibility of reaching the inflation target.

• Intervention in the foreign exchange rate through daily purchases that started on September 15 has been successful in reversing the peso’s tendency to revalue.  In the first month after the announcement, the currency kept its nominal value at the same time as the currencies of other emerging and developed countries appreciated.  Since then, the peso has depreciated along with other currencies but to a greater degree.  This is in spite of the fact that the intervention in Colombia has been significantly more limited than that of other countries.

The Board of Directors decided to extend the Bank’s intervention in the foreign exchange market and reinforce their intervention mechanisms.

• The Board decided to increase their purchase program for international reserves.  To do so, they will make daily purchases of at least US$20 million until at least March 15, 2011.  Previously, the daily purchase program extended up to at least January 15, 2011.

• The Board has strengthened its instruments for exchange rate intervention by linking the Bank to the Colombian Foreign Currency Clearing House, S.A. since October 14, 2010 which broadens the methods available for purchasing dollars on the market.

Last of all, the Board emphasized the measures taken by the national government to counteract the peso’s tendency to grow stronger and their commitment to reduce the fiscal deficit.  This is a basic step towards expanding the Bank’s possibilities for sterilized intervention in the foreign exchange market.

The Board of Directors will continue to follow up on the international situation, the performance of the projects and projections for inflation and growth carefully and reiterates that future monetary policy will depend on the new information that is available.

Bogota