BOGOTA: Colombia's central bank raised its benchmark lending rate a quarter point on Friday to 7.25 percent, the ninth consecutive monthly increase, in a bid to ease stubborn inflation. The decision was taken by majority.
The following is a Reuters translation of the statement accompanying the bank's decision: The central bank board decided to increase the interest rate by 25 basis points to 7.25 percent at its meeting today. In this decision, the board took into consideration mainly the following aspects:
Annual consumer inflation slowed in April and stood at 7.93 percent. In contrast, the average core inflation measures increased and reached 6.38 percent. Inflation expectations of analysts for one and two years stood at 4.5 percent and 3.7 percent, and those arising from public debt papers of 2, 3 and 5 years at between 4.3 percent and 4.7 percent.
The slight decline in annual inflation in April was mainly due to decreases in energy prices. However, the increase in food prices and the transfer of nominal depreciation to consumer prices continue to exert upward pressure on inflation. Despite being temporary shocks, the intensity of El Nino and the magnitude of the peso devaluation and inflation have diverted their expectations from the target and enabled some indexation mechanisms.
The figures in global economic activity for the second quarter suggest that the dynamics of global production will be higher than in the first. However, it is likely that the average growth of trading partners in 2016 is lower than in 2015.
The increase in the interest rate of the Federal Reserve of the United States could be sooner than anticipated in previous months. In this environment, the peso and other world currencies depreciated. Oil prices continued to rise and remain above projected levels for this year. With this, the fall in terms of trade and national income would be lower than expected earlier.
The information available indicates that in the first quarter, household spending grew at a similar rate as the quarter before and investment slowed. Thus, the technical team continues to project growth of 2.5 percent in the first quarter and throughout 2016, contained in a range between 1.5 percent and 3.2 percent.
In short, the Colombian economy is adjusting in an orderly fashion to the strong external shocks recorded since 2014. The risk of an excessive slowdown in domestic demand is moderate and excessive spending on national income persists, as reflected in a high current account deficit. Inflation has accelerated on account of the depreciation of the peso, the phenomenon of El Nino and the activation of some indexation mechanisms.
Given this environment, the response of monetary policy must recognize that the shocks that have affected the prices are transient, but must be oriented to ensure convergence of inflation to the target of 3 percent 1 percentage point in 2017. With that in mind, the board considered an increase of 25 basis points in the benchmark interest rate desirable. The tightening of monetary policy will also contribute to the correction of the external deficit.
The board will continue to monitor the expected adjustment of spending and its consistency with the income level of long-term sustainability of the external deficit and overall macroeconomic stability. It also reaffirms its commitment to control inflation and its expectations, recognizing that inflation increases are of a transitory nature.
Finally, the board announces it will hold no new auctions to dis-accumulate options for international reserves and will continue to use intervention mechanisms according to their suitability for achieving the policy objectives of the bank.
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