Banco de la Republica de Colombia raises benchmark rate 25 bps to 6%

By Caroline Salls

Pittsburgh, Jan. 29 – The board of directors of the Banco de la Republica de Colombia decided to increase its benchmark interest rate by 25 basis points to 6% in order to ensure convergence of inflation to the target range in 2017, according to a news release.

The bank said higher-than-expected food prices and additional increases in the exchange rate largely associated with the fall in oil prices continue to exert pressures on inflation increases, although inflation expectations remain high and the risk of an excessive slowdown in domestic demand remains moderate.

The board said annual consumer inflation stood at 6.77% in December and the average of the four measures of core inflation at 5.43%, and inflation expectations remain high.

The bank said the increase in inflation in 2015 is mainly explained by the partial transfer of the depreciation of consumer prices and the sharp increase in food prices.

The board said the magnitude of the devaluation of the peso and the strong El Nino will slow the convergence of inflation to the target.

According to the release, the bank projects gross domestic product growth in 2016 to range between 1.5% and 3.2%, with 2.7% as the most likely outcome. This board said this figure reflects an internal demand that would continue adjusting to lower national income.

The board said average growth of Colombia’s main trading partners remains weak.

The U.S. economy is expected to expand at a similar pace in 2016 as in 2015, the board said, while the euro area continues with a slow recovery. The bank said China is expected to grow less, while growth of economic activity in the major countries of Latin America will remain low or contract.

In the United States, the bank said it is likely that the Fed will make additional, incremental increases to the benchmark interest rate.

The bank pointed out that oil prices fell again and stood at lower levels than projected for 2016, triggering a further deterioration in the terms of trade.

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