THE GOVERNOR OF BANCO DE LA REPÚBLICA, José Darío Uribe presents: Monetary Policy Report and Accountability Report

1. Economic growth

Global growth remains weak and it is likely that external demand for Colombian products will grow more in 2016 than in 2015. Between September 2015 and January 2016, the price of oil fell by 33.0%. This decline implies further deterioration in the terms of trade and, therefore, of the country's national income. In this environment, and with the beginning of a gradual tightening of the monetary  policy in the United States, the country's risk premium increased and the peso depreciated 6.9% vis-à-vis the US dollar.  

The weak external demand, the fall in oil prices, and the highest level of the exchange rate have been reflected on the behavior of foreign trade and the country's financial account. During 2015, exports in US dollars fell 34.9% annually, a fact explained mainly by the fall of the external sales of mining and energy goods (-46.5% yearly). Between January and November of the same year, the value of imports fell by 15.0%  annually. The widening of the trade deficit explains to a large extent a current account deficit in 2015 close to USD 19 billion. It is expected that in 2016 the current account deficit will reduce close to USD 16 billion as a result of a projected fall in imports of goods and services, of the lower estimated profit remission by foreign companies, and by the expected recovery of exports of industrial origin.  

The most recent figures of economic activity suggest that output growth in the fourth quarter of 2015 would have been similar to that recorded in the third quarter. Domestic demand would have slowed down, mainly by a projected leveling in investment and lower consumption of durable goods. Net exports would  have contributed positively to growth. For all of 2015, economic growth is projected at 3.0% as the most likely figure, within a range between 2.8% and 3.2%. 

The technical staff at Banco de la República forecasts output growth in 2016 within a range from 1.5% to 3.2%, with 2.7% as the most likely outcome. This figure reflects that domestic demand would continue to adjust to the lower national income as a result of average oil prices which are forecast this year to be 34.0% below those of 2015. The greater devaluation of the peso would induce substitution of imported goods by local production, as well as a stimulus to exports.  

2. Inflation 

Annual consumer inflation to December 2015 stood at 6.77%, and the average of core inflation indicators registered 5.43%. The increase in inflation in 2015 is mainly explained by the partial pass-through of nominal depreciation to consumer prices and costs of raw materials, as well as by a strong increase in food prices due to El Niño. Measures of inflation expectations by analysts to one and two years increased, registering 4.5% and 3.7%, respectively, while those embedded in public debt bonds to 2, 3, and 5 years are above 4.5%.  

Although pass-through of the depreciation of the peso to consumer prices has been historically low, the level of the exchange rate is unusually high and persistent, and may continue impacting with a lag the prices of imported goods and services. Similarly, deterioration in food supply is expected to continue until the second quarter of 2016, when climate conditions are expected to normalize. In this context, although both shocks are transitory, they may still have a direct negative impact on prices, affecting inflation expectations and activating undesired indexation mechanisms.  

In this environment, the forecasts of the technical staff, which consider an active monetary policy, suggest that annual inflation will continue to increase until mid-2016 and will then begin to converge towards the 3.0% target, reaching it in 2017. 

3. Monetary Policy Decisions 

The most recent information suggests that higher-than-expected increases in food prices and further increases in the exchange rate largely related to the fall in the price of oil in previous months, continue exerting inflationary pressures. At the same time, inflation expectations remain high and, and there is still a moderate risk of a slowdown in domestic demand, exceeding that which is consistent with the decline in national income.

In this economic environment and in order to ensure convergence of inflation towards the target range within a two-year horizon, the Board of Directors decided to increase the benchmark interest rate by 50 bp in October, and 25 bp in the meetings of November and December 2015 and January 2016. Thus, the benchmark interest rate is now at 6.0%. 

On December 23, 2015, considering the liquidity conditions of the foreign exchange market, the Board decided to modify the percentage for the activation of the auction of options to decumulate international reserves and their exercise from 7.0% to 5.0%. The other conditions of the mechanism remained unaltered.