MNI POLICY: BanRep Front-Loads Hikes To Protect Credibility

The Central Bank of Colombia’s decision to raise its policy rate by a larger-than-expected 100 basis points last month to 10.25% was intended to send a message of commitment to its inflation target despite a divided board, and at a time of significant uncertainty over the direction of fiscal policy following May’s elections, MNI understands.

Frontloading hikes should mean that rates peak at a lower level and for a shorter time than if the tightening approach were more gradual, officials believe, but the outlook for government spending after the elections will be a key influence over the cycle.  While the central bank’s board hopes that the next government will be more fiscally disciplined than that of President Gustavo Petro, it also understands that it must be prepared for any scenario.

Recent decisions have revealed a deep split within the board, with three members dissenting from the majority. At January’s meeting, one voted to hold and two voted to cut by 50 basis points, despite inflation running well above target.

More hawkish board members already thought in November that they might have to raise rates this year in order to protect the Bank’s credibility, a scenario which has now materialized. (See MNI POLICY: BanRep 2026 Rate Hike Risk From Credibility Threat)

In the minutes of the decision, published last week, BanRep said the first rate hike would only be the beginning of the cycle, but that adjustments would be front-loaded.

"This allows for a faster re-anchoring of expectations and reduces the short-term costs of the adjustment process in terms of economic growth and employment," the board said.

The government’s decision to approve a hefty 23% increase in the minimum wage sent inflation projections higher, effectively shifting monetary policy to a new neutral stance, while the board’s majority prefers a restrictive setting.