Banco de la Republica de Colombia raises benchmark rate 25 bps to 5˝%

By Caroline Salls

Pittsburgh, Nov. 30 – The board of directors of the Banco de la Republica de Colombia decided to increase its benchmark interest rate by 25 basis points to 5˝%, according to a news release.

The board said the annual consumer inflation rate consumer stood at 5.89% in October, and the average of the four measures of core inflation at 5.11%. These results exceeded the bank’s projections and the average of the market.

As a result, the board said inflation expectations increased to 4.4% for the one-year projection and 3.6% for two years.

The bank said the acceleration of inflation is explained mainly by the transmission of price depreciation to the consumer and the increase in the cost of imported raw materials, as well as a less dynamic food supply.

According to the release, new figures for the third quarter, especially for retail sales, suggest a more dynamic-than-expected domestic demand.

On the supply side, the board said industrial production has shown a positive trend, and indicators and cement production suggest a favorable construction dynamic.

With this information and new data from economic activity in October, the board said the growth forecast for 2015 stayed between 2.4% and 3.4%, with 3% as the more likely figure.

The bank said the increase in inflation expectations has significantly reduced measures of the real rate of interest policy and the financial system. At the same time, domestic credit growth remains above the rate of product increase.

Meanwhile, the board said figures of world economic activity continue to reflect a dynamic external demand that is weaker and lower than that observed in 2014.

In the United States, the bank said domestic demand grows at favorable rates, while the euro zone is recovering slowly. In China, the slowdown continues, and the major Latin American economies registered low growth or contraction of the product, according to the release.

In addition, the board said the dollar appreciated, and prices of main commodities fell, although oil prices were below bank projections.

The board said a recorded fall in the terms of trade throughout the year has deteriorated national income and largely explains the higher level of the rate of exchange against the dollar.

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