The Board of Directors of Banco de la República maintains the Benchmark Interest Rate at 4.5%

The Board of Directors of Banco de la República in today’s meeting decided to maintain the benchmark interest rate at 4.5%. This decision took into account mainly the following aspects:

• In July, annual consumer inflation increased slightly, reaching  4.46%. The average of the four measures of core inflation rose for the tenth month in a row, registering at 4.29%. Analysts’ inflation expectations to one and two years  and those embedded in public debt to 2, 3 and 5 years increased and continue in the upper half of the target range.  
• The pass-through of nominal depreciation to consumer prices and the increase in the cost of imported raw materials, as well as the lower dynamics in food supply, explain in great part the acceleration of inflation so far this year. 
• The pass-through of part of the devaluation of the peso to consumer prices and the persistence of El Niño can delay the convergence of inflation to the target, both by their direct impact on prices and inflation expectations and through the activation of indexing mechanisms.
• The figures of global economic activity continue reflecting a weak external demand, lower to the one recorded in 2014. In the United States and the euro zone, economy continues to recover, but at rates somewhat lower than anticipated. In China, economic activity continues slowing down, and the major economies in Latin America registered low growth or contractions of their output.
• The risk of a greater economic slowdown in China and the unexpected devaluation of the yuan generated volatility in global financial markets and in the prices of some commodities. The US dollar continues to strengthen and it is expected that the Federal Reserve of the United States will increase its interest rate during the remaining of this year. 
• The international price of oil exhibited a significant decrease and the prices of several commodities imported by Colombia stopped falling. Should these levels in the prices of exports and imports continue, the terms of trade and the national income would fall more than expected. This largely explains the strong devaluation of the peso vis-à-vis the US dollar as compared with other countries’ currencies.
• In Colombia, for the second quarter, the indicators of retail trade, consumer and retail confidence, and economic expectations indicate that domestic demand continues to weaken. The industry contracted and construction indicators suggest a slowdown in the sector. Data for July show a fall in oil production, while that of coffee increased. Considering this, and given the developments observed in the external demand for domestic goods and services, the technical staff maintained the estimate of economic growth for all of 2015 within a range of 1.8% and 3.4%, with 2.8%, as the most likely outcome.

In all, inflation remains above the upper limit of the target range and domestic expenditure of the economy continues adjusting to the lower dynamics of national income. Projections indicate that in the monetary policy horizon, the temporary price shocks will be reversed and the probable excesses of capacity will contribute to inflation converging to the target in an environment of anchored inflation expectations. However, the partial pass-through of the devaluation of the peso to prices and an eventual intensification of El Niño could delay such convergence. 

The Board will continue monitoring carefully the behavior and projections of economic activity and inflation in the country, as well as those of asset markets and the international situation. It also reiterates that the course of monetary policy will depend on the information available.