BOGOTA: Colombia's central bank held the benchmark interest rate at 4.25 percent on Friday, as policymakers seek to prevent inflation increases amid a uncertain recovery in economic growth.
The following is a Reuters translation of the statement accompanying the bank's decision:
In its session today the bank board decided to keep the intervention interest rate at 4.25 percent. In this decision, the board took into consideration mainly the following issues:
In the last two months, annual inflation stopped falling and in May it stood at 3.16 percent. In the same month, the average of the basic inflation measures (3.43 percent) and the large components of the consumer price index also registered relatively stable annual variations.
The inflation expectations did not show significant changes. Those of analysts average 3.35 percent and 3.34 percent for December 2018 and 2019, respectively. Those derived from public debt papers at 2, 3 and 5 years are between 3 percent and 3.2 percent.
The growth of trading partners continues to recover, marked by the developed economies and the main emerging economies. Oil prices remain at levels that exceed the averages recorded in the last two years. The increase in the terms of trade and the expected dynamics of external demand will continue to favor the recovery of the country's external revenues. Despite this, in the last month the Colombian peso has depreciated against the dollar in an environment of increased risk.
The results of first-quarter gross domestic product growth and the indicators of economic activity for the second suggest that the economy will have continued with low growth, though higher than that registered in 2017. With these results, the bank's technical team maintained its growth estimate for 2018 in 2.7 percent. However, the bank's technical team estimates that the underutilization of productive capacity persists and that it will be extended in 2018.
In the first quarter of 2018 the balance of payments deficit was reduced compared to the same period of the previous year. The forecast of the bank's technical team for all of 2018 points towards a slight closing of the external deficit as a proportion of GDP.
Based on this information, the board pondered the following factors in its decision:
The weakness of the economic activity and the uncertainty about the speed of its recovery. On the one hand, it is projected that the excess production capacity would expand in 2018. On the other hand, if the oil price remains at the current levels for a prolonged period or the growing trend of confidence persists, the dynamics of aggregate demand could be larger than expected.
The stability of inflation and its expectations above 3 percent, and some risks that could push inflation upwards. One of them is a rebound in the price of food that affects expectations and delays the convergence of inflation to 3 percent. Likewise, a stronger than expected depreciation of the peso is transferred to domestic prices. Again, the uncertainty about these factors is high.
In this environment, when evaluating the state of the economy and the balance of risks, the board considered it convenient to maintain the reference interest rate at 4.25 percent.
The board will continue to carefully monitor the behavior of inflation and projections of economic activity and inflation in the country, as well as the international situation. Finally, it reiterates that monetary policy will depend on the new information available.
The decision to maintain the interest rate at 4.25 percent was unanimously approved by the board members.
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