Banco de la República raises the intervention interest rate

At a meeting today, the Board of Directors of Banco de la República (The Central Bank of Colombia) decided to raise the intervention interest rate by 25 basis points. Accordingly, the base repo auction rate will be 5.25%. This decision was taken in light of the following. 

• The new figures on global economic activity reflect a slowdown in external demand, as anticipated. The forecasts for 2012 point to negative economic growth in Europe and indicate the United States could post a rate slightly below that of its potential. The pace of economic activity in the emerging market economies is expected to be slower as well. Therefore, average growth for Colombia’s trading partners is likely to be less this year than in 2011. 

• International oil prices continued to rise and prices for the other commodities Colombia exports remain high. Terms of trade are at historically elevated levels and are fueling growth in national income. 

• The latest figures suggest the Colombian economy continued to exhibit strong momentum in the fourth quarter of 2011; they also point to the persistence of this performance during early 2012. Exports as well as imports of capital goods continued to grow at a brisk pace in December. During that same month, the industrial confidence index remained at high levels and retail sales expanded at a good pace. In January, the consumer confidence index was up for the third straight month and reached record highs. 

• Growth in lending remains high, although the latest data suggest a bit of a slowdown. However, the pattern in consumer lending indicates households have significantly raised their level of borrowing. With the recent intervention interest rate hikes, market rates are expected to approach their average historic levels more quickly. 

• Annual inflation was 3.54% in January, having fallen for the third month in a row, as anticipated by the Central Bank’s technical team. Contrary to what happened in previous months, the core inflation indicators also declined. Given the latest policy measures, inflation expectations are forecast to converge towards the middle of the target range. 

• A disorderly adjustment in Europe is still the major risk in the central forecasts. If that risk were to materialize, the world economy could growth far less than expected, international commodity prices could plunge and global aversion to risk could intensify, all of which could have an adverse impact on the Colombian economy. Furthermore, political tensions in the Middle East may lead to higher oil prices. Although this initially would mean more revenue from Colombian exports, it may have a negative impact on world economic growth. The primary risk to inflation comes from excessive growth in demand or increases in costs, above and beyond those anticipated, with strong and lasting effects on expectations and the credibility of the country’s monetary policy. Over a longer time line, excessive growth in lending or in the price of certain assets can be a source of financial imbalances with negative consequences for the sustainability of output and employment. 

According to this risk-balance assessment, the Board of Directors decided to raise Banco de la República’s intervention interest rate by 25 basis points. It also agreed to extend the program for daily purchases of dollars in minimum amounts of USD 20 million until at least August 4 of this year. 

The Board of Directors will continue to carefully monitor the international situation and forecasts and performance with respect to inflation, economic growth, and the performance of asset markets. It reiterated that monetary will depend on whatever new information becomes available. 

Bogotá