Colombia’s Benchmark Interest Rate Will Remain At 4.5%

Colombia’s Central Bank board at its meeting last Friday decided to keep the country’s benchmark interest rate at 4.5% taking into account the following:

The United States economy is expanding at a slower pace, and the Euro area and Japan are showing signs of gradual recovery. China continues to slow while the national product of the major Latin American countries is growing at low or negative rates. It is likely that the average economic growth of Colombia’s regional trading partners in 2015 will end lower than in 2014.

The dollar has strengthened and the risk premiums of Colombia and other countries in the region have declined. The international price of oil has increased somewhat. However, it is estimated that oil’s portion of the cumulative trade of Colombia has permanently declined, and this will affect the dynamics of national income.

The Colombian economy is adjusting to new external conditions in an environment of slower growth in consumption and investment. Export revenues have declined due to lower international prices, especially oil.

The strength of the labor market continues and real interest rates remain in expansionary territory. Also, it is expected that investment in civil works and construction will continue to grow,and over time, the real devaluation of the peso will have a positive impact on the performance of the sectors that export and compete with imports.

Inflation rose in April and stood at 4.64%; higher than projected by the average of the market and the central bank’s projection. Higher inflation was mainly explained by the increase in food prices and, to a lesser extent by the transfer of the peso devaluation on prices. The average core inflation measures rose again and stood at 3.84%.

Inflation expectations by analysts for December 2015 stood at 3.92% and for May and December 2016 and remained relatively stable around 3%. Yields arising from government notes maturing in 2, 3 and 5 years decreased and kept close to the long-term goal.

In short, the observed increase in inflation has been due to transitory factors and their medium-term expectations remain close to 3% in a context of slowdown in aggregate demand.

The Board will continue to carefully monitor the behavior and projections of economic activity and inflation in the country, asset markets and the international situation. It reiterates also that monetary policy will depend on the information available

This is an edited translation of a statement issued by Colombia’s central bank, Banco de la Republica.