Colombia’s Central Bank Leaves Benchmark Interest Rate at 4.5%

The Board of Colombia’s Bank of The Republic, at its meeting last Friday decided to keep the benchmark interest rate at 4.5%. According a statement released by the Central Bank, the Board took into consideration the following aspects when reaching its decision:

• The average economic growth of Colombia’s primary trading partners in 2015 will remain low, but somewhat higher than a year ago. The growth of emerging economies has declined, and for advanced economies, gradual improvement is expected in Europe and Japan, and stability in the United States.
• In 2014 the growth of the Colombian economy (4.6%) was lower than projected by the Bank of the Republic (4.8%), while that of 2013 was revised from 4.7% to 4.9%. Meanwhile, GDP growth in the fourth quarter of 2014 (3.5%) was in the lower range forecasted by the bank’s technical team.
• 2015 real GDP growth of between 2% and 4%, with 3.6% as more probable figure is expected. The lower expected growth reflects the negative effect of falling oil prices on national income, exports and investment. The amplitude of the forecast range reflects the high degree of uncertainty.
• The devaluation of the peso reflects the general strengthening of the dollar, the effects of falling oil prices and the size of the current account deficit. Devaluation is a stimulus for exports and import-competing sectors and helps to moderate the negative impact of oil prices on the fiscal and external accounts. It also increases the prices in the short term, especially for tradable goods.
• Consumer inflation reached 4.36% in February, higher than projected by the market average and the bank’s technical team. The increase was due mainly to the higher rate of increase in food prices which are expected to decline in the second half of the year, followed by the increase in prices of tradable goods. The core inflation rate stood at 3.53%.
• Based on the estimation of the technical team of the Central Bank, the board believes that inflation will converge to its target starting from the second half of 2015.
• Inflation expectations of analysts out to December of 2015 stood at 3.65% from March, and projections out to December 2016 remain relatively stable at approximately 3%.

In summary, in late 2014 the Colombian economy retreated from a level approaching full utilization of productive capacity. That slowdown is expected to continue in 2015. Inflation increased mainly due to temporary factors and expectations are now slightly above 3%. Because the reduction in oil prices and petroleum-derived national income is long term in nature, domestic spending in the economy should be adjusted commensurately. The Board will continue to monitor the size of the adjustment and its consistency with the level of income and long-term macroeconomic stability. It also reaffirms the commitment to keep inflation and expectations anchored to the target, while recognizing that there will be a transitory increase in inflation.

Assessing the balance of risks, the Board considered it appropriate to maintain the benchmark interest rate at current levels, and reiterates that monetary policy depends upon the information available.

Above photo: Colombia’s Banco De La Republica Board of Directors,  Photo credit Juan Enrique Rodríguez.