MNI POLICY: BanRep 2026 Rate Hike Risk From Credibility Threat

More hawkish members of Colombia’s central bank board worry that the institution’s inflation-fighting credibility is already in jeopardy due to a board split which has seen votes by other members to cut rates despite persistent price pressures, with this concern boosting the risk of a hike next year, MNI understands.

While Banco de la Republica’s board held the policy rate at 9.25% on Oct 31, the meeting saw another split vote, with three members voting for cuts since since July, and with two pushing for a deep 50-basis-point cut. In the meeting’s minutes, members who voted to hold raised the possibility of a hike and pointed to the risk that BanRep’s credibility could be damaged should inflation rise faster than the baseline.

But the hawkish members consider that the Bank’s credibility has only been maintained by its insistence on holding policy unchanged, amid strong pressure from the government to cut rates and plans for a significant increase in Colombia’s minimum wage, MNI understands. While they do not see the need for a hike yet, this concern over credibility is part of their calculations.

BanRep’s last unanimous decision was in May when it cut by 25 basis points. (See MNI IN1TERVIEW: Limited Room For BanRep Cuts This Year-Steiner)

“Several members even indicated that future interest rate increases could be considered if certain inflationary risks materialize which, although not part of the baseline scenario, should not be underestimated,” the minutes said. “If that scenario materialized, the credibility of the Bank which forms the basis of its inflation-targeting framework could be affected.”

INFLATION REBOUND

Headline inflation rose for a fourth consecutive month to 5.51% in October, according to data announced in November, above the 3% target. Core inflation stood at 5.25%.

Earlier this year, President Gustavo Petro appointed two new members to the BanRep board, Laura Moisa and Cesar Augusto Giraldo, to replace Roberto Steiner and Jaime Jaramillo. The move, which was in line with Colombian law, was seen as an attempt to make the board more dovish.

According to the minutes, the members who voted for a 50bp cut emphasized that the positive gap between the real policy interest rate and the neutral real interest rate is wide enough to allow easing to support the recovery of economic activity.

The board member who voted for a 25bp cut stressed that the structure of inflation in Colombia makes it particularly sensitive to supply shocks, some of which are persistent in nature and cannot necessarily be influenced by the domestic interest rate.