The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%

The Board of Directors of Banco de la República at today’s meeting decided to maintain the benchmark interest rate at 7.75%. For this decision, the Board mainly took into account the following aspects:

• In July, annual consumer inflation and the average of core inflation indicators increased, reaching 8.97% and 6.61%, respectively. Analysts’ inflation expectations to one and two years remained stable, posting at 4.6% and 3.7%, respectively, and those embedded in public debt bonds to 2, 3, and 5 years lowered within a range of 3.8% and 4.4%.
• The lagged effects of El Niño, the high depreciation in the past and its partial pass-through to consumer prices, and the activation of some indexation mechanisms explain to a large extent the difference between inflation and its target. In the following months, normalization of weather conditions and agricultural supply must generate drops in the prices of food, especially of perishable items. 
• Global economic activity remains weak and it is likely that the average growth of Colombia's trading partners for 2016 be low and less than estimated a month ago. As for the United States, a slow tightening of monetary policy is still projected. The price of oil remains above the levels recorded at the beginning of the year, and the prices of some international commodities imported by Colombia have fallen.  With this, the terms of trade have increased, but remain at low levels, lower than the average observed in 2015. 
• In the second quarter of 2016, the Colombian economy grew 2.0% annually, a figure lower than the central forecast by the technical staff at the Central Bank (2.6%). The most dynamic sectors were industry and financial services, while mining, agriculture and electricity, gas and water utilities reported declines in their production. These figures, together with the new records of economic activity for the third quarter, suggest a downward bias to the growth projection for 2016. 
• Foreign trade figures for the second quarter suggest that the external deficit narrowed. The technical staff continues forecasting a current account deficit of US 15 billion in 2016, equivalent to 5.3% of GDP, lower than initially forecast.   

In all, the Colombian economy continues to adjust to the strong shocks recorded since 2014, and the current account deficit is narrowing gradually. The dynamism of output has been weaker than projected, and inflation and its expectations remain high, exceeding the target. The effects of transitory supply shocks that have affected inflation and its expectations are expected to begin reversing in the following months. This, together with the monetary policy actions taken so far, should lead inflation to its target range in 2017.

In this environment, after assessing the risk balance for inflation and growth, the Board of Directors deemed appropriate to maintain the benchmark interest rate unaltered.  New data on the behavior of prices and aggregate demand will provide more information about the speed of the expected convergence of inflation to the target, and the intensity, nature, and persistence of the economic slowdown.

The Board will continue to monitor the adjustment of expenditure and its consistency with the long-term income level, the sustainability of the external deficit, and, in general, macroeconomic stability. Similarly, it reaffirms its commitment to maintain inflation and its expectations anchored to the target, acknowledging that there has been a transitory increase in inflation.

The decision to maintain the benchmark interest rate unaltered was approved by six members of the Board; one member voted for a 25 basis points increase. The voting balance in each meeting of the Board will continue to be revealed in the corresponding press release.

Bogotá