The Bank of the Republic kept its interest rate stable at 1.75%. This was announced this Monday by Leonardo Villar, manager of the Issuer.
The decision was made unanimously taking into account that in the first quarter of 2021, the economy achieved higher than expected growth, dynamism that was maintained in April, as shown by the Economic Monitoring Index.
According to the Bank’s board, however, the third wave of Covid-19 contagion, and to a greater extent road blockades and public order problems will be reflected in less economic activity during the second quarter. Despite this, the good performance until April justified a revision of the GDP growth forecast for 2021 from 6% to 6.5% in the baseline scenario. Even in this scenario, the level of economic activity would continue to be lower than in 2019. Furthermore, unemployment and informality rates remain at particularly high levels.
(See also: The market would have already assumed the rate hike).
INFLATION EXCEEDED FORECASTS
For its part, according to calculations by the Issuer, annual inflation in May of 3.3% exceeded forecasts. The upward pressure came from the food group (9.52%), and especially from perishable foods (18.16%), due to supply difficulties in various cities. The increase in core inflation, excluding food and regulated items (1.56%), it stayed below the goal and was similar to what was projected. Some of the recent increase in inflation could have some persistence and affect expectations, which remain anchored.
Despite the growth in external demand and the improvement in the terms of trade, a higher current account deficit is projected, consistent with the better dynamism of domestic demand.
In the United States, inflation surprised to the upside and its expected value remains above the 2% target set by the Federal Reserve. This has generated expectations about the possibility that the start of normalization can be advanced of monetary policy in that country, which would make international financial conditions less favorable and affect risk appetite for investments in emerging economies.
Given the fiscal and public debt situation, if the required fiscal adjustment in public finances is not achieved, access to financing would be compromised and its cost would increase, which would eventually reduce the space for monetary policy to continue supporting the recovery of economic activity. and employment.
ARE THE RATES GOING TO MOVE?
Regarding the possibility of the Banco de la República moving rates in the coming months, the Issuer’s manager, Leonardo Villar, stated that although the June decision was made based on the information already available, “To the extent that we have more information on some aspects that may generate uncertainty, there could be later changes in the monetary policy decision”.
Along the same lines, José Manuel Restrepo, Minister of Finance, pointed out that both the Banco de la República and the Government will be “Constantly monitoring what happens with the course of the economy and the effects of the performance of the pandemic by covid in the economy.”