Increase of 150 basis points: an unprecedented rise in interest rates

The Board of Directors of Banco de la República decided increase by 150 basis points (bp or 1.5 percentage points) the monetary policy interest rate, up to 7.5%, the highest increase since 1998 and the most important since when the target inflation policy was launched, in October 2000.

(Read: Banco de la República increases interest rate to 7.5%).

The general manager of the issuer, Leonardo Villar, said that the annual inflation rate remains high atl reach levels of 9.23% in April and 9.07% in May. At the same time, core inflation without food or regulated items went from 5.26% in April to 5.87% in May. He assured that inflation expectations continued to rise and are significantly above the 3% target in the policy horizon.

He also confirmed that economic growth surprised to the upside in the first quarter (8.2% vs. 7.2% expected by the technical team) thanks to the strengthening of the domestic demand driven by household consumption.

The consumer portfolio registered an annual growth of 22.1% in mid-June. The economic monitoring indicator (ISE) showed an annual variation of 11.8% in April, higher than the expected 8.6%.

Villar said that on this basis, “the technical team revised upwards its forecast for growth for 2022 from 5.0% to 6.3%”.

He assured that the sustained recovery of the GDP continues to favor the dynamism of the labor market, which has been showing sustained growth in employment. As of May, employment registered an annual growth of 11% in the national total and 10.5% in the 13 main cities.

He said that the current account of the balance of payments showed in the first quarter of the year a deficit of 6.4% as a proportion of quarterly GDPhigher than the deficit of 4.1% of GDP for the same period of the previous year.

“This excess demand occurs in an environment in which external financing becomes more expensive due to the tightening of international financial conditions,” the issuer’s statement stated.

He emphasized that the decision is compatible with the strength that economic activity has been showing in recent quarters, “and will help to position monetary policy more quickly on a path that reduces inflation and converges to the goal in the medium term.” . Going forward, the pace of monetary policy adjustment will depend on the new information available.”

Finance Minister José Manuel Restrepo said that the decision “was taken unanimously and reflects the commitment of the board of directors to normalize monetary policy to fight inflation.”

(Also: Unemployment reached 10.6% in May driven by the municipalities).

He assured that the central bank board is aware of the inflationary shock, the growth of the economy and its high expectationsthe recovery of employment and the rise in interest rates by the Federal Reserve in the US.

Villar said that it is impossible for the Banco de la República board to say what level the interest rate will reach. “This increase was strong and unprecedented and is aimed at trying to make expectations and inflation itself converge to the target. The decisions of the next meetings will be taken with the best information and the commitment to recover inflation in line with 3%, knowing that this does not imply that it is in the short term, since there is a lag and there are inflation shocks in Colombia and the other regions of the world,” he said.

Jackeline Piraján, an economist at Scotiabank Colpatria, said that the credit expansion of consumption grows more than 20% and it is a sign that consumers can tolerate higher rates a little more. He estimated that there is an incentive for people to save a little more than they did before, seeing more favorable remuneration, considering that the terminal rate this year will be above 8%.

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