Banco de la Republica raises the benchmark interest rate 25 basis points
The Board of Directors of the Banco de la Republica decided to raise the benchmark interest rate 25 basis points in their session today. Consequently, the base rate for the liquidity-expansion auctions will be 3.75%. The decision was made with the following in mind:
- In March, annual inflation was 3.19%, a figure that is similar to what was seen a month earlier. The average for the core inflation indicators, in turn, remained stable and stayed below the midpoint of the target range (3% +/- 1 percentage point).
- The different measurements of inflation expectations for a year from now are within the inflation target range. The long term ones (five and ten years), measured by means of public debt papers, declined but continue to stay above the upper limit of the target range. The inflation projections done by the technical team at the Bank show an inflation that is close to the midpoint of the target range at the end of both 2011 and 2012.
- World economic growth, mainly driven by the Asian economies, is still expanding. International prices for commodities including those for petroleum and food have risen in recent months as a result of the strength of demand in emerging economies and negative supply shocks. This has been reflected in rises in the measurements of consumer prices in many countries. Also, some of the central banks in Latin America and Asia as well as the European Central Bank have been raising their interest rates.
- In Colombia, the 4.3% growth of the GDP in 2010 was higher than expected. The information from the first quarter of the year suggests that this economic performance is still going on. Terms of trade continue to improve and are at historically high levels. This contributes to the growth of national revenue. Consumer expectations have risen and investment in machinery and equipment is still strong. It is also believed that the same thing is happening in public works projects.
- The technical team raised the range of the growth outlook for 2011 by 50 bp to an interval of between 4% and 6%. The lower end of this range takes into account the negative effect that the worsening of rainy season weather could have on economic activity. However, the probability that the level of output may be close to its potential rose.
- The various indicators for housing prices are still rising and are now at levels that are near the maximum levels registered in history.
- Likewise, all of the credit components are still growing at a significant pace along with some real interest rates for loans low income loans. That being the case, household debt has also climbed.
All of the above suggests that the adjustment to a less expansionary monetary policy should go forward. The new level for the Banco de la Republica’s benchmark interest rate continues to support the short term growth of output and employment.
The increases in the benchmark rate will serve to keep inflation within the target range for this year and the next as well as help avoid future financial imbalances. Also, the steps taken by the monetary policy in advance together with an austere fiscal position will lower the level to which the benchmark interest rate will have to rise in comparison to the levels seen in previous economic cycles.
The Board reaffirms its commitment to purchasing at least 20 million dollars daily until at least June 17 and will keep on monitoring the international situation, the trend and outlook for inflation, the growth of output and employment, asset markets and private debt carefully and reiterates that monetary policy will depend on the new information available.
Bogotá, Colombia
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