Banco de la República reduces the benchmark interest rate by 25 bp to 7.25%

The Board of Directors of Banco de la República at today’s meeting decided to reduce the benchmark interest rate by 25 bp to 7.25%. For this decision, the Board mainly took into account the following aspects:

• In January, annual consumer inflation decreased for sixth consecutive month, reaching 5.47%. The average of core inflation indicators remained stable at 5.61%. Analysts’ inflation expectations to December 2017 increased, and continue above the range of 2.0% to 4.0%; those to two years and those embedded in public debt bonds to 2, 3, and 5 years remained stable, posting between 3.7% and 4.8%. 
• The effects of the strong transitory supply shocks that diverted inflation from its target continue to fade. For example, the slowdown of the food CPI in January suggests this. 
• External demand growth is expected to be higher in 2017 than in 2016. The long-term international interest rates remain at levels higher than those recorded in 2016 and the Colombia’s terms of trade are still recovering. In this environment, the peso has appreciated vis-à-vis the US dollar.
• In Colombia, economic growth in the fourth quarter of 2016 was 1.6%, slightly better than in the third quarter; for the whole year it stood at 2.0%. The consumer confidence indicator for January 2017 recorded a sharp fall. Should this be reflected on household spending, the growth forecast for 2017 could be reduced (2.0% within a range between 0.7% and 2.7%). 
• 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.

Based on this information, the Board considered the following factors in its decision:

• The weakness of economic activity and the risk of an excessive deceleration. 
• Uncertainty about the speed of convergence of inflation to its target.  
• The current level of the real policy interest rate is contractionary.

In this environment, the Board considered that the path of policy interest rates compatible with an adequate balance of the aforementioned risks includes a 25 bp reduction. The new information on inflation, economic activity, and the international context will determine the pace of policy normalization.

The decision to reduce the benchmark interest rate was approved by four members of the Board. The remaining two Board Members voted in favor of keeping the benchmark interest rate at 7.5%.

Bogotá