##tedness does not seem excessive. in historical terms, there is less currency and maturity mismatches in balance sheets. finally, headway is being made in integrating us further with world trade through various means, one of the most important being bilateral trade agreements. a strong framework of macroeconomic and financial policies means that the colombian economy can better absorb changes in the international economy, be they temporary turbulence or more lasting adjustments. let me remind you that our inflation targeting scheme allows us to be flexible and discretionary in how we respond to shocks such as these. but in exchange for this flexibility in our instruments, we must keep fixed on three commitments. the first is our monetary policy objective : we must try and keep inflation close to its target path without letting the output gap fluctuate excessively. the second is to explain our actions, so the private sector can plan accordingly. the third commitment is on the part of our partners in the government to support this effort with an appropriate fiscal policy and financial supervision. this strategy should help with whatever awaits us on the road ahead. of course, we will continue to monitor developments carefully. but we should not let events on international financial markets distract us unnecessarily from these three commitments. if we perceive a further threat to inflation, we should act preemptively to avoid reaching a point where we would have to deal with high domestic inflation, a larger current account deficit and higher international market spreads. v. concluding remarks in conclusion, the colombian economy has grown very strongly in 2007 as it did in 2006 and 2005. the growth was not just in consumption. private investment, especially in machinery and equipment, and exports have increased strongly too. we can now surely say that our productive capacity has recovered from the recession of the late 1990s. but we are also aware that we must not let domestic demand rise too far above productive capacity. this would create inflation pressure. in my review of the data, i concluded that although much of inflation was due to temporary fluctuations in food prices, there was also some underlying demand pressure. evidence from a wide variety of other data corroborated that domestic demand was growing too fast. excess demand would mean not just inflation but that imports were stimulated to feed a large current account deficit. thus the rises in our interest rates since april 2006 have been aimed both at containing inflation pressure and keeping our economy on a sustainable path. i discussed some of the likely channels through which the recent turbulence in international financial markets could come to

, international food prices have acted to push down on inflation but given recent rises in world market prices they could be a source of inflationary pressure going forward. but then there is still 28 % which we attribute to domestic demand. and the higher inflation was not just in food. annual non - food inflation went from 3. 6 % in june 2006 to 4. 3 % by august of this year. the average of the three core inflation indicators used by the banco de la republica increased from 3. 7 % to 4. 9 % during the same period. the behavior of a series called “ non - tradable goods excluding food and regulated prices ” is particularly worth noting, with an annual price increase of 4. 8 % at december 2006 and 5. 6 % at present, including a major build - up in the months of july and august. all of this suggests that while the special food price factors were important, there was also an underlying demand - push pressure on consumer prices. inflation expectations for the short - term exceeded the target range. this too was important. if left to rise further, they could have fed the inflationary process and be reflected in wage negotiations, in company pricing policies, and in decision - making on financial markets. if not dealt with early on, high inflation would build up and force a more costly adjustment later on. iii. the orientation of monetary policy before i go on to interpret this data and to explain how we responded, let me remind you of the objective of monetary policy in colombia. we aim to achieve low and stable inflation. for this year, the operational target is inflation between 3. 5 % and 4. 5 % but by the midterm we aim to keep inflation to within 1 percentage point of 3 %. the objective of low, stable inflation is to provide the economy with a nominal anchor. but we recognize that monetary policy must also help to stabilize resource utilization in the economy near its average or long - term level as long as inflation expectations are anchored to the inflation target. the challenge, therefore, is to define an interest rate level for the central bank that is conducive to meeting the quantitative target for inflation and does its best to keep resource utilization close to its long - term level. the aim is to prevent the economy from either overheating or cooling too much. as shown earlier, inflation in colombia rose during first four months of 2007 and although it has fallen back it is still above the center of the target range.