Banco de la República reduces the benchmark interest rate by 25 bp to 5.0%

The Board of Directors of the Central Bank of Colombia, at today’s meeting, decided to reduce the benchmark interest rate by 25 bp to 5.0%. For this decision, the Board mainly took into account the following aspects:

• In September, inflation increased, reaching 3.97%. The acceleration of inflation was mainly explained by the higher rate of the yearly increase of the food CPI due to a low basis for comparison. The average of core inflation indicators continued descending, standing at 4.58%.

• In the past three months, inflation was lower than expected by the market and by the Central Bank's technical staff. In this sense, the technical staff reduced the inflation forecasts for this year and the next.

• Inflation expectations recorded slight changes. Those by analysts to December 2017 and 2018 stand, on average, at 4.07% and 3.58%, respectively. Those embedded in public debt bonds remain above 3.0%.

• The direct effects of the strong transitory supply shocks that deviated yearly inflation from its target have faded, and core inflation indicators continue reducing. The effects of the indexation of prices and of the increases in indirect taxes at the beginning of the year are expected to reduce, and with this, that inflation and core inflation measures converge to the target.

• External demand continues recovering, driven mainly by developed economies. Oil prices increased, and the terms of trade are expected to end the year above the average level recorded in 2016. In the United States, the Federal Reserve is likely to increase its policy rate during the rest of the year. In this environment, the peso has depreciated vis-à-vis the US dollar. 

• In Colombia, the technical staff maintained growth estimations for 2017 at 1.6%, and increased its growth projection for 2018 from 2.4% to 2.7%. However, this growth is below its potential; for this reason, the underuse of the installed capacity of the economy is expected to continue expanding.

• New data suggests that the current account deficit in 2017 would be 3.7% as a percentage of GDP, decreasing vis-à-vis 2016 (4.4 %). For 2018, this adjustment in the current account is expected to continue.

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

• Weakness in economic activity and the risk of a slowdown beyond what is compatible with the deterioration in the income dynamics due to the fall in oil prices. Despite the fact that the forecast of the technical staff for GDP growth increased for the coming year, the output gap would continue to expand. 

• The lower results of inflation versus the forecast from the last quarter and the lower projections of the technical staff in the policy horizon. This behavior has been registered in several of the sub-groups of the CPI, especially food, and tradable goods excluding food and regulated items. These results suggest that convergence of inflation to its 3.0% target could be faster, although uncertainty in this regard remains high.

• Although the orderly adjustment of the current account deficit is expected to continue, there are risks in the international environment that may affect such adjustment.

In this context, when evaluating the risk balance, the Board of Directors deemed appropriate to reduce the benchmark interest rate by 25 bp, using the space associated with the lower inflation projections for 2018. However, the international environment poses risks that limit the countercyclical capacity of monetary policy in the future. Accordingly, this reduction should not be understood as part of a continuous path of cuts.

The decision to reduce the benchmark interest rate was approved by five (5) members of the Board. The two (2) remaining Board Members voted to maintain the policy rate unaltered.

Bogotá.