The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 7.5%

The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 7.5%. For this decision, the Board mainly took into account the following aspects:
 

• In November, annual consumer inflation and the average of core inflation indicators lowered, reaching 5.96% and 5.74%, respectively, completing four consecutive months in which the reduction of inflation exceeded the forecast of the technical staff at the Central Bank. Analysts’ inflation expectations to one and two years posted at 4.36% and 3.58%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years are between 3.8% and 4.4%. 
• The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade quickly. This is suggested by the slowdown in the food CPI, and to a lesser extent, by the recent behavior of the prices that were mostly impacted in the past by the strong nominal depreciation. 
• Global economic activity remains weak, and it is likely that it will register a slight recovery in 2017. In the US, gradual tightening of the monetary policy continued, the US dollar has strengthened, and the long-term international interest rates increased.  Colombia´s terms of trade continue recovering due to the increase in the prices of oil.  In this setting, the recent depreciation of the peso has been moderate.
• In the third quarter, the Colombian economy expanded 1.2% yearly, a figure lower than expected by the technical staff at Banco de la República and by the market. Domestic demand fell 1.1% due to lower investment and the slowdown in consumption.  These results and the new figures of economic activity for the fourth quarter suggest that economic growth in 2016 could be slightly lower than 2.0%.   
• The new figures confirm that the current account deficit continues to reduce.  The forecast of the technical staff suggests a current account deficit of 4.7% of GDP in 2016 (equivalent to US$ 13.2 billion). 
• Considering the current level of core inflation indicators and inflation expectations, various calculations of the real policy interest rate are above its average since 2005.  Also, credit has strongly slowed-down, especially commercial credit. 

In all, the Colombian economy continues to adjust to the strong shocks recorded since 2014, and the current account deficit is narrowing gradually.  Inflation continues to decline faster than expected, although core inflation indicators and inflation expectations to a year still exceed the target. The effects of several of the transitory supply shocks that have affected inflation and inflation expectations continue to reverse, and this trend is expected to continue. 

Monetary policy decisions have ensured the process of convergence of inflation to its target and reaffirm the commitment of the Board to reach the 3.0% ± 1 pp target in 2017. In this environment, and facing a weaker-than-forecast output dynamics, the Board of Directors decided to reduce the degree of tightness of the monetary policy stance by reducing the benchmark interest rate by 25 bp. 

Future policy decisions will depend on new data on the speed of convergence of inflation to the target and the intensity, nature, and persistence of the economic slowdown, among other things.

The Board considers that, given the negative effects of the fall in oil prices on public finances, the structural tax reform bill presented by the Government to the Congress is a crucial action that contributes to long-term growth, to strengthen fiscal sustainability, to maintain macroeconomic stability, and to preserve the credit rating.

The Board will continue to monitor the adjustment of expenditures and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, the macroeconomic stability. It also reaffirms its commitment to maintain inflation and its expectations anchored to the target. 

The decision to reduce the benchmark interest rate was approved by four members of the Board. The three remaining members of the Board voted to keep it unaltered.

Bogotá,