Banco de la Republica raised the benchmark interest rate 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. As a result, the base rate for liquidity-expansion auctions will be 4.25%. The decision was made based on the following:

• In May annual inflation rose slightly and was at 3.02%. This is primarily explained by the increase in the prices for food which had had a larger than expected decline in April. The average for the core inflation indicators remained stable and inflation projections for the end of this year and the coming one are staying around the mid-point of the target range (3% +/- 1 percentage point).

• The economic activity indicators for a large number of the developed economies like the public debt crisis in some European countries suggest that the recovery in those countries could be slower than what had been estimated before. In contrast, the strength of the demand in emerging countries which are commodity consumers is continuing and their international prices are staying at high levels. Colombia’s terms of trade are still at historically high levels.

• Among the different real indicators available after the above mentioned Board of Director’s meeting, the sharp fall in the investment in public works projects that occurred in the first quarter stands out. This decline was not expected and is probably temporary in character.
   

• For the second quarter of 2011, the indicators for household consumption show buoyancy. The same thing is true of the indicators for commerce and industry. Nevertheless, both the consumer confidence ones and the indicators of industrial and merchant expectations have dropped.
   
• The growth of credit continued rising. All of the components including not only the one for companies but also that for households showed real rates of growth that were significantly higher than the increase in the GDP. This situation has occurred in a context in which many of the real interest rates are at historically low levels.

The increase in the benchmark rate is intended to keep inflation within the target range for this year and the coming one and will contribute to preventing future financial imbalances.

The Board will continue to carefully monitor the international situation, the trend and projections for inflation, growth, and the performance of the asset markets. They also reiterate that monetary policy will depend on the new information that is available.

Bogotá