The Banco de la Republica raised the benchmark interest rate by 25 basis points

In their session today, the Board of Directors of the Banco de la Republica decided to raise the benchmark interest rate 25 basis points.  Consequently, the base rate for the liquidity-expansion auctions will be 4.0%.  The decision was made with the following in mind:

• Annual consumer inflation fell in April and settled at 2.84%.  The drop was more pronounced than what the market had foreseen and is mainly explained by the performance of food prices.  This last phenomenon is one that could reverse itself in May.  The probability that inflation will end up close to the midpoint of the target range at the end of the year is high.

• The average for the core inflation measurements is staying below 3% and inflation expectations for one year and 5-years that came out of the surveys or from the public debt paper are within the target range for inflation.

• The different real indicators that are available point to economic activity maintaining its strength.  This positive performance is supported by a significant expansion of domestic demand in both consumption and investment as well as by the healthy performance of sales abroad.  Colombia’s terms of trade remain at historically high levels and continue to have a positive effect on national revenue.
   
• The ranges for the economic growth outlook for the first quarter and all of 2011 were not changed. The new information suggests that between January and March, the expansion rate for economic activity could be in the upper part of the projected range (3.9% - 5.5%).  Thus, the probability that the output gap will close in the second half of 2011 rose.

• Credit continues climbing and the interest rates for new consumer loans (excluding credit cards), for commercial and housing loans have adjusted and are rising at a slower pace than the accumulated increase in the policy rate.

All of the above suggests that the move towards a less expansionary monetary policy should continue.  The level of the Banco de la Republica’s benchmark interest rate is still supporting the growth of output and employment.

The rises in the benchmark rate are aimed at keeping inflation within the target range for this year and the coming one and contribute to avoiding future financial imbalances.  The Board will continue to monitor the international situation, the trend and projections for inflation, growth, and the performance of the asset markets carefully.  They also reiterate that monetary policy will depend on the new information that is available.

Finally, the Board decided to extend its program for purchasing international reserves.  To do so, daily purchases of at least US$20 million will be made until at least September 30, 2011.

Bogotá, Colombia