Banco de la Republica de Colombia’s board raises benchmark rate to 4%

By Caroline Salls

Pittsburgh, June 20 – The board of directors of the Banco de la Republica de Colombia decided to increase its benchmark interest rate by 25 basis points to 4%, according to a news release.

This marks the second straight month the bank raised the interest rate. Last month, the rate was raised 25 bps to 3¾%.

The board said in Friday’s release that annual consumer inflation in May was higher than expected and converged faster than expected toward 3%. Meanwhile, the bank said inflation expectations increased over the previous month.

The directors said the 6.4% growth of the economy in the first quarter was significantly higher than expected and accelerated from the previous quarter. In addition, 2013 gross domestic product growth was revised upward.

Although demand-side figures are not yet known, the board said available information suggests a high buoyant domestic demand, particularly in the investment component. This new information increases the likelihood that the economy is close to full use of its production capacity in 2014, while the seasonally adjusted unemployment rate maintained its downward trend, the release said.

To the extent that inflation has converged to 3%, the bank said different real interest rates have fallen. In May, total credit continued to accelerate, driven by the behavior of commercial and mortgage loans. The board said consumer credit deceleration stopped.

According to the release, economic activity in the United States is recovering from a first-quarter fall. In the Euro zone, the bank said the recovery continued in the second quarter slowly, as expected. The board said growth in emerging Asia is stabilizing at favorable rates. In Latin America, the directors said the growth of several major economies continues to slow.

The board said increased upside risks weighed on inflation in the past month. The greater-than-predicted first-quarter growth, growth acceleration from last year and revised figures for 2013 could lead to the emergence of faster-than-expected inflationary pressures, the bank said.

Under these circumstances, the board said the current macroeconomic stability and inflation convergence to the long-term goal is compatible with a further increase in the interest rate.

In addition, the bank said the gradual adjustment of the expansionary stance of monetary policy reduces the need for sudden changes in the future and ensures macroeconomic stability.

The board said it also decided to increase the amount of purchases of international reserves during the third quarter, with plans to accumulate up to $2 billion between July and September.

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